|
|
|
|
@$#@@%#@%#@#@$#@$#@$#@$@
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(Dollars in millions except
per share amounts)
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
14,225
|
|
$
|
14,626
|
|
$
|
42,811
|
|
$
|
44,279
|
|
Sales
|
|
|
8,987
|
|
|
9,642
|
|
|
27,735
|
|
|
29,424
|
|
Financing
|
|
|
509
|
|
|
479
|
|
|
1,506
|
|
|
1,500
|
|
Total
revenue
|
|
|
23,720
|
|
|
24,747
|
|
|
72,052
|
|
|
75,203
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
9,098
|
|
|
9,515
|
|
|
27,950
|
|
|
29,285
|
|
Sales
|
|
|
2,975
|
|
|
3,242
|
|
|
9,108
|
|
|
10,003
|
|
Financing
|
|
|
268
|
|
|
258
|
|
|
805
|
|
|
784
|
|
Total
cost
|
|
|
12,341
|
|
|
13,016
|
|
|
37,863
|
|
|
40,072
|
|
Gross
profit
|
|
|
11,380
|
|
|
11,732
|
|
|
34,189
|
|
|
35,131
|
|
Expense
and other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
5,255
|
|
|
5,908
|
|
|
17,512
|
|
|
17,632
|
|
Research,
development and engineering
|
|
|
1,468
|
|
|
1,534
|
|
|
4,661
|
|
|
4,722
|
|
Intellectual
property and custom
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
income
|
|
|
(191)
|
|
|
(303)
|
|
|
(621)
|
|
|
(847)
|
|
Other
(income) and expense
|
|
|
(62)
|
|
|
(606)
|
|
|
(214)
|
|
|
(796)
|
|
Interest
expense
|
|
|
97
|
|
|
124
|
|
|
289
|
|
|
350
|
|
Total
expense and other income
|
|
|
6,567
|
|
|
6,657
|
|
|
21,627
|
|
|
21,060
|
|
Income
before income taxes
|
|
|
4,812
|
|
|
5,074
|
|
|
12,562
|
|
|
14,071
|
|
Provision
for income taxes
|
|
|
772
|
|
|
1,251
|
|
|
2,263
|
|
|
3,300
|
|
Net
income
|
|
$
|
4,041
|
|
$
|
3,824
|
|
$
|
10,299
|
|
$
|
10,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming
dilution
|
|
$
|
3.68
|
|
$
|
3.33
|
|
$
|
9.27
|
|
$
|
9.27
|
|
|
Basic
|
|
$
|
3.70
|
|
$
|
3.36
|
|
$
|
9.35
|
|
$
|
9.38
|
|
Weighted-average
number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding: (millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming
dilution
|
|
|
1,098.8
|
|
|
1,149.3
|
|
|
1,110.7
|
|
|
1,161.8
|
|
|
Basic
|
|
|
1,090.9
|
|
|
1,137.2
|
|
|
1,101.8
|
|
|
1,148.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividend per common share
|
|
$
|
0.95
|
|
$
|
0.85
|
|
$
|
2.75
|
|
$
|
2.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts may not add due to rounding.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(The accompanying notes are an integral part of the
financial statements.)
|
|
|
|
|
|
|
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
(Dollars in millions)
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Net
income
|
|
$
|
4,041
|
|
$
|
3,824
|
|
$
|
10,299
|
|
$
|
10,771
|
|
Other
comprehensive income/(loss), before tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
382
|
|
|
501
|
|
|
(959)
|
|
|
164
|
|
|
Net
changes related to available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains/(losses) arising during the period
|
|
|
3
|
|
|
11
|
|
|
0
|
|
|
13
|
|
|
|
Reclassification
of (gains)/losses to net income
|
|
|
(5)
|
|
|
(27)
|
|
|
(5)
|
|
|
(43)
|
|
|
|
Subsequent
changes in previously impaired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities arising during the period
|
|
|
1
|
|
|
(7)
|
|
|
3
|
|
|
20
|
|
|
Total
net changes related to available-for-sale securities
|
|
|
(1)
|
|
|
(24)
|
|
|
(1)
|
|
|
(10)
|
|
|
Unrealized
gains/(losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains/(losses) arising during the period
|
|
|
(409)
|
|
|
(54)
|
|
|
(58)
|
|
|
65
|
|
|
|
Reclassification
of (gains)/losses to net income
|
|
|
(27)
|
|
|
(112)
|
|
|
(130)
|
|
|
(246)
|
|
|
Total
unrealized gains/(losses) on cash flow hedges
|
|
|
(436)
|
|
|
(165)
|
|
|
(188)
|
|
|
(181)
|
|
|
Retirement-related
benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service costs/(credits)
|
|
|
0
|
|
|
0
|
|
|
33
|
|
|
0
|
|
|
|
Net
(losses)/gains arising during the period
|
|
|
105
|
|
|
1
|
|
|
300
|
|
|
66
|
|
|
|
Curtailments
and settlements
|
|
|
0
|
|
|
(2)
|
|
|
0
|
|
|
(1)
|
|
|
|
Amortization
of prior service (credits)/costs
|
|
|
(28)
|
|
|
(37)
|
|
|
(86)
|
|
|
(112)
|
|
|
|
Amortization
of net (gains)/losses
|
|
|
872
|
|
|
613
|
|
|
2,623
|
|
|
1,846
|
|
|
Total
retirement-related benefit plans
|
|
|
949
|
|
|
575
|
|
|
2,869
|
|
|
1,799
|
|
Other
comprehensive income/(loss), before tax
|
|
|
895
|
|
|
887
|
|
|
1,721
|
|
|
1,771
|
|
Income
tax (expense)/benefit related to items of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
comprehensive income
|
|
|
(91)
|
|
|
(109)
|
|
|
(933)
|
|
|
(606)
|
|
Other
comprehensive income/(loss)
|
|
|
804
|
|
|
778
|
|
|
788
|
|
|
1,165
|
|
Total
comprehensive income/(loss)
|
|
$
|
4,844
|
|
$
|
4,601
|
|
$
|
11,087
|
|
$
|
11,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts may not add due to rounding.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(The accompanying notes are an integral part of the financial
statements.)
|
|
|
|
|
|
|
|
|
|
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF
FINANCIAL POSITION
(UNAUDITED)
ASSETS
|
|
|
|
|
|
At September 30,
|
|
At December 31,
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
10,072
|
|
$
|
10,412
|
|
|
|
Marketable
securities
|
|
|
160
|
|
|
717
|
|
|
|
Notes
and accounts receivable - trade (net of allowances of $273
|
|
|
|
|
|
|
|
|
|
|
in
2013 and $255 in 2012)
|
|
|
9,865
|
|
|
10,667
|
|
|
|
Short-term
financing receivables (net of allowances of $280 in 2013
|
|
|
|
|
|
|
|
|
|
|
and
$288 in 2012)
|
|
|
16,786
|
|
|
18,038
|
|
|
|
Other
accounts receivable (net of allowances of $29 in 2013 and
|
|
|
|
|
|
|
|
|
|
|
$17
in 2012)
|
|
|
1,683
|
|
|
1,873
|
|
|
|
Inventories,
at lower of average cost or market:
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
|
528
|
|
|
475
|
|
|
|
|
Work
in process and raw materials
|
|
|
1,964
|
|
|
1,812
|
|
|
|
Total
inventories
|
|
|
2,492
|
|
|
2,287
|
|
|
|
Deferred
taxes
|
|
|
1,752
|
|
|
1,415
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
4,723
|
|
|
4,024
|
|
|
Total
current assets
|
|
|
47,533
|
|
|
49,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
40,808
|
|
|
40,501
|
|
|
|
Less:
Accumulated depreciation
|
|
|
26,931
|
|
|
26,505
|
|
|
Property,
plant and equipment — net
|
|
|
13,877
|
|
|
13,996
|
|
|
Long-term
financing receivables (net of allowances of $72 in 2013
|
|
|
|
|
|
|
|
|
|
and
$66 in 2012)
|
|
|
11,675
|
|
|
12,812
|
|
|
Prepaid
pension assets
|
|
|
1,476
|
|
|
945
|
|
|
Deferred
taxes
|
|
|
3,682
|
|
|
3,973
|
|
|
Goodwill
|
|
|
30,882
|
|
|
29,247
|
|
|
Intangible
assets — net
|
|
|
4,003
|
|
|
3,787
|
|
|
Investments
and sundry assets
|
|
|
4,718
|
|
|
5,021
|
|
|
Total
assets
|
|
$
|
117,845
|
|
$
|
119,213
|
|
|
|
|
|
|
|
|
|
(Amounts may not add due to rounding.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(The accompanying notes are an integral part of the
financial statements.)
|
|
|
|
|
|
|
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION – (CONTINUED)
(UNAUDITED)
LIABILITIES AND
EQUITY
|
(Dollars in millions)
|
|
At September 30,
|
|
At December 31,
|
|
2013
|
2012
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
4,746
|
|
$
|
4,948
|
|
|
|
Short-term
debt
|
|
|
7,702
|
|
|
9,181
|
|
|
|
Accounts
payable
|
|
|
6,263
|
|
|
7,952
|
|
|
|
Compensation
and benefits
|
|
|
4,210
|
|
|
4,745
|
|
|
|
Deferred
income
|
|
|
11,658
|
|
|
11,952
|
|
|
|
Other
accrued expenses and liabilities
|
|
|
4,643
|
|
|
4,847
|
|
|
Total
current liabilities
|
|
|
39,222
|
|
|
43,625
|
|
|
Long-term
debt
|
|
|
28,478
|
|
|
24,088
|
|
|
Retirement
and nonpension postretirement benefit obligations
|
|
|
17,994
|
|
|
20,418
|
|
|
Deferred
income
|
|
|
4,087
|
|
|
4,491
|
|
|
Other
liabilities
|
|
|
8,057
|
|
|
7,607
|
|
|
Total
liabilities
|
|
|
97,837
|
|
|
100,229
|
|
Equity:
|
|
|
|
|
|
|
|
IBM
stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.20 per share, and additional paid-in capital
|
|
|
51,203
|
|
|
50,110
|
|
|
|
Shares
authorized: 4,687,500,000
|
|
|
|
|
|
|
|
|
|
Shares
issued: 2013 - 2,205,819,186
|
|
|
|
|
|
|
|
|
|
2012 - 2,197,561,159
|
|
|
|
|
|
|
|
|
Retained
earnings
|
|
|
124,885
|
|
|
117,641
|
|
|
Treasury
stock - at cost
|
|
|
(131,240)
|
|
|
(123,131)
|
|
|
|
Shares:
2013 - 1,119,964,803
|
|
|
|
|
|
|
|
|
|
2012 - 1,080,193,483
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income/(loss)
|
|
|
(24,971)
|
|
|
(25,759)
|
|
|
Total
IBM stockholders’ equity
|
|
|
19,877
|
|
|
18,860
|
|
Noncontrolling
interests
|
|
|
131
|
|
|
124
|
|
Total
equity
|
|
|
20,008
|
|
|
18,984
|
|
Total
liabilities and equity
|
|
$
|
117,845
|
|
$
|
119,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts may not add due to rounding.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(The accompanying notes are an integral part of the
financial statements.)
|
|
|
|
|
|
|
INTERNATIONAL BUSINESS MACHINES CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH
FLOWS
(UNAUDITED)
|
|
|
|
|
Nine Months Ended
September 30,
|
|
(Dollars in millions)
|
|
|
2013
|
|
|
2012
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
10,299
|
|
$
|
10,771
|
|
Adjustments
to reconcile net income to cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,457
|
|
|
2,572
|
|
|
Amortization
of intangibles
|
|
|
1,007
|
|
|
952
|
|
|
Stock-based
compensation
|
|
|
455
|
|
|
510
|
|
|
Net
(gain)/loss on asset sales and other
|
|
|
(139)
|
|
|
(697)
|
|
|
Changes
in operating assets and liabilities, net of acquisitions/divestitures
|
|
|
(3,121)
|
|
|
(868)
|
|
Net
cash provided by operating activities
|
|
|
10,957
|
|
|
13,240
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Payments
for property, plant and equipment
|
|
|
(2,559)
|
|
|
(3,082)
|
|
|
Proceeds
from disposition of property, plant and equipment
|
|
|
256
|
|
|
233
|
|
|
Investment
in software
|
|
|
(406)
|
|
|
(476)
|
|
|
Acquisition
of businesses, net of cash acquired
|
|
|
(2,562)
|
|
|
(2,266)
|
|
|
Divestitures
of businesses, net of cash transferred
|
|
|
247
|
|
|
587
|
|
|
Non-operating
finance receivables — net
|
|
|
284
|
|
|
718
|
|
|
Purchases
of marketable securities and other investments
|
|
|
(3,718)
|
|
|
(2,596)
|
|
|
Proceeds
from disposition of marketable securities and other investments
|
|
|
4,035
|
|
|
1,971
|
|
Net
cash used in investing activities
|
|
|
(4,423)
|
|
|
(4,912)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from new debt
|
|
|
10,066
|
|
|
9,589
|
|
|
Payments
to settle debt
|
|
|
(7,740)
|
|
|
(4,991)
|
|
|
Short-term
borrowings/(repayments) less than 90 days — net
|
|
|
1,074
|
|
|
(2,177)
|
|
|
Common
stock repurchases
|
|
|
(8,062)
|
|
|
(8,988)
|
|
|
Common
stock transactions — other
|
|
|
826
|
|
|
1,198
|
|
|
Cash
dividends paid
|
|
|
(3,033)
|
|
|
(2,816)
|
|
Net
cash used in financing activities
|
|
|
(6,870)
|
|
|
(8,185)
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(4)
|
|
|
(156)
|
|
Net
change in cash and cash equivalents
|
|
|
(340)
|
|
|
(13)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at January 1
|
|
|
10,412
|
|
|
11,922
|
|
Cash
and cash equivalents at September 30
|
|
$
|
10,072
|
|
$
|
11,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts may not add due to rounding.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(The accompanying notes are an integral part of the
financial statements.)
|
|
|
|
|
|
|
INTERNATIONAL BUSINESS MACHINES
CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
Stock and
|
|
|
Accumulated
|
|
|
|
|
|
Additional
|
|
|
Other
|
Total IBM
|
Non-
|
|
|
|
|
Paid-in
|
|
Retained
|
|
Treasury
|
|
Comprehensive
|
|
Stockholders'
|
|
Controlling
|
|
Total
|
|
(Dollars in millions)
|
|
Capital
|
|
Earnings
|
|
Stock
|
|
Income/(Loss)
|
|
Equity
|
|
Interests
|
|
Equity
|
|
Equity
- January 1, 2013
|
|
$
|
50,110
|
|
$
|
117,641
|
|
$
|
(123,131)
|
|
$
|
(25,759)
|
|
$
|
18,860
|
|
$
|
124
|
|
$
|
18,984
|
|
Net
income plus other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
10,299
|
|
|
|
|
|
|
|
|
10,299
|
|
|
|
|
|
10,299
|
|
Other comprehensive income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
788
|
|
|
788
|
|
|
|
|
|
788
|
|
Total
comprehensive income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,087
|
|
|
|
|
$
|
11,087
|
|
Cash
dividends declared –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock
|
|
|
|
|
|
(3,033)
|
|
|
|
|
|
|
|
|
(3,033)
|
|
|
|
|
|
(3,033)
|
|
Common
stock issued under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee plans (8,258,027 shares)
|
|
|
930
|
|
|
|
|
|
|
|
|
|
|
|
930
|
|
|
|
|
|
930
|
|
Purchases
(1,419,498 shares) and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sales (1,574,179 shares) of treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock under employee plans – net
|
|
|
|
|
|
(22)
|
|
|
(106)
|
|
|
|
|
|
(127)
|
|
|
|
|
|
(127)
|
|
Other
treasury shares purchased,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
not retired (39,926,001 shares)
|
|
|
|
|
|
|
|
|
(8,003)
|
|
|
|
|
|
(8,003)
|
|
|
|
|
|
(8,003)
|
|
Changes
in other equity
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
164
|
|
|
|
|
|
164
|
|
Changes
in noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
7
|
|
Equity
- September 30, 2013
|
|
$
|
51,203
|
|
$
|
124,885
|
|
$
|
(131,240)
|
|
$
|
(24,971)
|
|
$
|
19,877
|
|
$
|
131
|
|
$
|
20,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
Stock and
|
|
|
Accumulated
|
|
|
|
|
|
Additional
|
|
|
Other
|
Total IBM
|
Non-
|
|
|
|
|
Paid-in
|
|
Retained
|
|
Treasury
|
|
Comprehensive
|
|
Stockholders'
|
|
Controlling
|
|
Total
|
|
(Dollars in millions)
|
|
Capital
|
|
Earnings
|
|
Stock
|
|
Income/(Loss)
|
|
Equity
|
|
Interests
|
|
Equity
|
|
Equity
- January 1, 2012
|
|
$
|
48,129
|
|
$
|
104,857
|
|
$
|
(110,963)
|
|
$
|
(21,885)
|
|
$
|
20,138
|
|
$
|
97
|
|
$
|
20,236
|
|
Net
income plus other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
10,771
|
|
|
|
|
|
|
|
|
10,771
|
|
|
|
|
|
10,771
|
|
Other comprehensive income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
1,165
|
|
|
1,165
|
|
|
|
|
|
1,165
|
|
Total
comprehensive income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,936
|
|
|
|
|
$
|
11,936
|
|
Cash
dividends declared –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock
|
|
|
|
|
|
(2,816)
|
|
|
|
|
|
|
|
|
(2,816)
|
|
|
|
|
|
(2,816)
|
|
Common
stock issued under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee plans (12,322,115 shares)
|
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
|
1,149
|
|
|
|
|
|
1,149
|
|
Purchases
(2,092,008 shares) and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sales (2,358,099 shares) of treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock under employee plans – net
|
|
|
|
|
|
(40)
|
|
|
(145)
|
|
|
|
|
|
(185)
|
|
|
|
|
|
(185)
|
|
Other
treasury shares purchased,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
not retired (45,838,313 shares)
|
|
|
|
|
|
|
|
|
(9,007)
|
|
|
|
|
|
(9,007)
|
|
|
|
|
|
(9,007)
|
|
Changes
in other equity
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
324
|
|
|
|
|
|
324
|
|
Changes
in noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
29
|
|
Equity
- September 30, 2012
|
|
$
|
49,603
|
|
$
|
112,773
|
|
$
|
(120,115)
|
|
$
|
(20,720)
|
|
$
|
21,541
|
|
$
|
126
|
|
$
|
21,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts may not add due to rounding.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(The accompanying notes are an integral part of the
financial statements.)
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements:
1. Basis of
Presentation: The
accompanying Consolidated Financial Statements and footnotes of the
International Business Machines Corporation (IBM or the company) have been
prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP). The financial statements and footnotes are
unaudited. In the opinion of the company's management, these statements include
all adjustments, which are only of a normal recurring nature, necessary to
present a fair statement of the company's results of operations, financial position
and cash flows.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the assets, liabilities,
revenue, costs, expenses and accumulated other comprehensive income/(loss) that
are reported in the Consolidated Financial Statements and accompanying
disclosures. These estimates are based on management’s best knowledge of
current events, historical experience, actions that the company may undertake
in the future and on various other assumptions that are believed to be
reasonable under the circumstances. As a result, actual results may be
different from these estimates. See the company's 2012 Annual Report on pages
59 to 61 for a discussion of the company's critical accounting estimates.
Interim results are not necessarily indicative of financial results for a full
year. The information included in this Form 10-Q should be read in conjunction
with the company's 2012 Annual Report.
Noncontrolling interest amounts in income of $1.8 million and $3.0 million, net of tax, for
the three months ended September 30, 2013 and 2012, respectively, and $4.2 million and $8.6 million, net of tax, for
the nine months ended September 30, 2013 and 2012, respectively, are included
in the Consolidated Statement of Earnings within the other (income) and expense
line item.
Within the financial statements and tables presented, certain columns and rows
may not add due to the use of rounded numbers for disclosure purposes.
Percentages presented are calculated from the underlying whole-dollar amounts.
Certain prior year amounts have been reclassified to conform to the current
year presentation. This is annotated where applicable.
2. Accounting
Changes: In July 2013, the Financial
Accounting Standards Board (FASB) issued guidance allowing the use of the Fed
Funds Effective Swap Rate (or Overnight Index Swap Rate) as a benchmark
interest rate for hedge accounting purposes in addition to interest rates on
direct Treasury obligations of the United States government and the LIBOR. In
addition, the guidance removes the restriction on using different benchmark
rates for similar hedges. The guidance became effective on a prospective basis
for qualifying new or redesignated hedging relationships entered into on or
after July 17, 2013, and did not have a material impact in the consolidated
financial results.
In July
2013, the FASB issued guidance regarding the presentation of an unrecognized
tax benefit when a net operating loss carryforward, a similar tax loss, or a
tax credit carryforward exists. Under certain circumstances, unrecognized tax
benefits should be presented in the financial statements as a reduction to a
deferred tax asset for a net operating loss carryforward, a similar tax loss,
or a tax credit carryforward. The guidance is a change in financial statement
presentation only and has no material impact in the consolidated financial
results. The guidance is effective beginning January 1, 2014 on either a prospective
or retrospective basis.
In
March 2013, the FASB issued guidance on when foreign currency translation
adjustments should be released to net income. When a parent entity ceases to
have a controlling financial interest in a subsidiary or group of assets that
is a business within a foreign entity, the parent is required to release any
related cumulative translation adjustment into net income. Accordingly, the
cumulative translation adjustment should be released into net income only if
the sale or transfer results in the complete or substantially complete
liquidation of the foreign entity in which the subsidiary or group of assets
had resided. The guidance is effective prospectively beginning January 1, 2014.
It is not expected to have a material impact in the consolidated financial
results.
In
February 2013, the FASB issued guidance for the recognition, measurement and
disclosure of obligations resulting from joint and several liability
arrangements for which the total amount of the obligation within the scope of
the guidance is fixed at the reporting date. Examples include debt
arrangements, other contractual obligations and settled litigation. The
guidance requires an entity to measure such obligations as the sum of the
amount that the reporting entity agreed to pay on the basis of its arrangement
among its co-obligors plus additional amounts the reporting entity expects to
pay on behalf of its co-obligors. The guidance is effective January 1, 2014 and
is not expected to have a material impact in the consolidated financial
results.
Notes to Consolidated Financial
Statements – (continued)
3. Financial Instruments:
Fair Value Measurements
Accounting guidance
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants
at the measurement date. Under this guidance, the company is required to
classify certain assets and liabilities based on the following fair value
hierarchy:
·
Level 1—Quoted prices (unadjusted)
in active markets for identical assets or liabilities that can be accessed at
the measurement date;
·
Level 2—Inputs other than quoted
prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly; and
·
Level 3—Unobservable inputs for
the asset or liability.
The guidance requires
the use of observable market data if such data is available without undue cost
and effort.
When available, the
company uses unadjusted quoted market prices in active markets to measure the
fair value and classifies such items within Level 1. If quoted market prices
are not available, fair value is based upon internally developed models that
use current market-based or independently sourced market parameters such as
interest rates and currency rates. Items valued using internally generated
models are classified according to the lowest level input or value driver that
is significant to the valuation.
The determination of
fair value considers various factors including interest rate yield curves and
time value underlying the financial instruments. For derivatives and debt
securities, the company uses a discounted cash flow analysis using discount
rates commensurate with the duration of the instrument.
In determining the fair
value of financial instruments, the company considers certain market valuation
adjustments to the “base valuations” calculated using the methodologies
described below for several parameters that market participants would consider
in determining fair value:
·
Counterparty credit risk
adjustments are applied to financial instruments, taking into account the
actual credit risk of a counterparty as observed in the credit default swap
market to determine the true fair value of such an instrument.
·
Credit risk adjustments are
applied to reflect the company’s own credit risk when valuing all liabilities
measured at fair value. The methodology is consistent with that applied in
developing counterparty credit risk adjustments, but incorporates the company’s
own credit risk as observed in the credit default swap market.
As an example, the
fair value of derivatives is derived utilizing a discounted cash flow model
that uses observable market inputs such as known notional value amounts, yield
curves, spot and forward exchange rates as well as discount rates. These inputs
relate to liquid, heavily traded currencies with active markets which are
available for the full term of the derivative.
Certain financial assets
are measured at fair value on a nonrecurring basis. These assets include equity
method investments that are recognized at fair value at the measurement date to
the extent that they are deemed to be other-than-temporarily impaired. Certain
assets that are measured at fair value on a recurring basis can be subject to
nonrecurring fair value measurements. These assets include available-for-sale
equity investments that are deemed to be other-than-temporarily impaired. In
the event of an other-than-temporary impairment of a financial investment, fair
value is measured using a model described above.
Non-financial assets
such as property, plant and equipment, land, goodwill and intangible assets are
also subject to nonrecurring fair value measurements if they are deemed to be
impaired. The impairment models used for nonfinancial assets depend on the type
of asset. See Note A,“Significant Accounting Policies,” on pages 76 to 86
in the company’s 2012 Annual Report for further information. There were no material
impairments of non-financial assets for the nine months ended September 30,
2013 and
2012, respectively.
Accounting guidance
permits the measurement of eligible financial assets, financial liabilities and
firm commitments at fair value, on an instrument-by-instrument basis, that are
otherwise not permitted to be accounted for at fair value under other
accounting standards. This election is irrevocable. The company does not apply
the fair value option to any eligible assets or liabilities.
The following tables
present the company’s financial assets and financial liabilities that are
measured at fair value on a recurring basis at September 30, 2013 and December
31, 2012.
Notes to Consolidated Financial
Statements – (continued)
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2013
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits and certificates of deposit
|
|
$
|
—
|
|
$
|
4,422
|
|
$
|
—
|
|
$
|
4,422
|
|
|
|
|
Commercial paper
|
|
|
—
|
|
|
992
|
|
|
—
|
|
|
992
|
|
|
|
|
Money market funds
|
|
|
1,713
|
|
|
—
|
|
|
—
|
|
|
1,713
|
|
|
|
|
U.S. government securities
|
|
|
—
|
|
|
800
|
|
|
—
|
|
|
800
|
|
|
|
|
Other securities
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
|
|
Total
|
|
|
1,713
|
|
|
6,225
|
|
|
—
|
|
|
7,938
|
(6)
|
|
|
Debt
securities - current (2)
|
|
|
—
|
|
|
160
|
|
|
|
|
|
160
|
(6)
|
|
|
Debt
securities - noncurrent (3)
|
|
|
1
|
|
|
8
|
|
|
—
|
|
|
9
|
|
|
|
Available-for-sale
equity investments (3)
|
|
|
32
|
|
|
—
|
|
|
—
|
|
|
32
|
|
|
|
Derivative
assets (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
—
|
|
|
412
|
|
|
—
|
|
|
412
|
|
|
|
|
Foreign exchange contracts
|
|
|
—
|
|
|
371
|
|
|
—
|
|
|
371
|
|
|
|
|
Equity contracts
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
9
|
|
|
|
Total
|
|
|
—
|
|
|
793
|
|
|
—
|
|
|
793
|
(7)
|
|
Total
assets
|
|
$
|
1,747
|
|
$
|
7,185
|
|
$
|
—
|
|
$
|
8,932
|
(7)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
—
|
|
$
|
575
|
|
$
|
—
|
|
$
|
575
|
|
|
|
|
Equity contracts
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
7
|
|
|
Total
liabilities
|
|
$
|
—
|
|
$
|
581
|
|
$
|
—
|
|
$
|
581
|
(7)
|
(1)
Included within cash and cash equivalents in the Consolidated Statement of
Financial Position.
(2)
Commercial paper and certificates of deposit reported as marketable securities
in the Consolidated Statement of
Financial Position.
(3)
Included within investments and sundry assets in the Consolidated Statement of
Financial Position.
(4)
The gross balances of derivative assets contained within prepaid expenses and
other current assets, and investments
and sundry assets in the Consolidated Statement of Financial Position at
September 30, 2013 were $396
million and
$397 million, respectively.
(5)
The gross balances of derivative liabilities contained within other accrued
expenses and liabilities, and other
liabilities in the Consolidated Statement of Financial Position at September
30, 2013 were $432
million and $150
million, respectively.
(6) Available-for-sale securities with carrying values that approximate
fair value.
(7)
If derivative exposures covered by a qualifying master netting agreement had
been netted in the Consolidated
Statement of Financial Position, the total derivative asset and liability
positions would have been reduced by $343
million each.
Notes to Consolidated Financial
Statements – (continued)
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits and certificates of deposit
|
|
$
|
—
|
|
$
|
3,694
|
|
$
|
—
|
|
$
|
3,694
|
|
|
|
|
Commercial paper
|
|
|
—
|
|
|
2,098
|
|
|
—
|
|
|
2,098
|
|
|
|
|
Money market funds
|
|
|
1,923
|
|
|
—
|
|
|
—
|
|
|
1,923
|
|
|
|
|
Other securities
|
|
|
—
|
|
|
30
|
|
|
—
|
|
|
30
|
|
|
|
Total
|
|
|
1,923
|
|
|
5,823
|
|
|
—
|
|
|
7,746
|
(6)
|
|
|
Debt
securities - current (2)
|
|
|
—
|
|
|
717
|
|
|
—
|
|
|
717
|
(6)
|
|
|
Debt
securities - noncurrent (3)
|
|
|
2
|
|
|
8
|
|
|
—
|
|
|
10
|
|
|
|
Available-for-sale
equity investments (3)
|
|
|
34
|
|
|
—
|
|
|
—
|
|
|
34
|
|
|
|
Derivative
assets (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
—
|
|
|
604
|
|
|
—
|
|
|
604
|
|
|
|
|
Foreign exchange contracts
|
|
|
—
|
|
|
305
|
|
|
—
|
|
|
305
|
|
|
|
|
Equity contracts
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
9
|
|
|
|
Total
|
|
|
—
|
|
|
918
|
|
|
—
|
|
|
918
|
(7)
|
|
Total
assets
|
|
$
|
1,959
|
|
$
|
7,466
|
|
$
|
—
|
|
$
|
9,424
|
(7)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
—
|
|
$
|
496
|
|
$
|
—
|
|
$
|
496
|
|
|
|
|
Equity contracts
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
7
|
|
|
Total
liabilities
|
|
$
|
—
|
|
$
|
503
|
|
$
|
—
|
|
$
|
503
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Included within cash and cash equivalents in the Consolidated Statement of
Financial Position.
(2)
Commercial paper and certificates of deposit reported as marketable securities
in the Consolidated Statement of
Financial Position.
(3)
Included within investments and sundry assets in the Consolidated Statement of
Financial Position.
(4)
The gross balances of derivative assets contained within prepaid expenses and
other current assets, and investments
and sundry assets in the Consolidated Statement of Financial Position at
December 31, 2012 were $333
million and
$585 million, respectively.
(5)
The gross balances of derivative liabilities contained within other accrued
expenses and liabilities, and other
liabilities in the Consolidated Statement of Financial Position at December 31,
2012 were $426 million
and $78
million, respectively.
(6) Available-for-sale securities with carrying values that approximate
fair value.
(7)
If derivative exposures covered by a qualifying master netting agreement had
been netted in the Consolidated
Statement of Financial Position, the total derivative asset and liability positions
would have been reduced by $262
million each.
There were no transfers
between Levels 1 and 2 for the nine months ended September 30, 2013 and the
year ended December 31, 2012.
Financial Assets and
Liabilities Not Measured at Fair Value
Short-Term Receivables and
Payables
Notes and
other accounts receivable and other investments are financial assets with
carrying values that approximate fair value. Accounts payable, other accrued
expenses and short-term debt (excluding the current portion of long-term debt)
are financial liabilities with carrying values that approximate fair value. If
measured at fair value in the financial statements, these financial instruments
would be classified as Level 3 in the fair value hierarchy.
Loans and Long-term Receivables
Fair values are based
on discounted future cash flows using current interest rates offered for
similar loans to clients with similar credit ratings for the same remaining
maturities. At September 30, 2013 and December 31, 2012, the difference between
the carrying amount and estimated fair value for loans and long-term
receivables was immaterial. If measured at fair value in the financial
statements, these financial instruments would be classified as Level 3 in the
fair value hierarchy.
Notes to Consolidated Financial
Statements – (continued)
Long-term Debt
Fair value of
publicly-traded long-term debt is based on quoted market prices for the identical
liability when traded as an asset in an active market. For other long-term debt
for which a quoted market price is not available, an expected present value
technique that uses rates currently available to the company for debt with
similar terms and remaining maturities is used to estimate fair value. The
carrying amount of long-term debt was $28,478 million and $24,088 million and the estimated
fair value was $30,409 million
and $27,119 million at
September 30, 2013 and December 31, 2012, respectively. If measured at fair
value in the financial statements, long-term debt (including the current
portion) would be classified as Level 2 in the fair value hierarchy.
Debt and Marketable Equity
Securities
The company’s cash equivalents and current debt securities
are considered available-for-sale and recorded at fair value, which is not
materially different from carrying value, in the Consolidated Statement of
Financial Position. The following tables summarize the company’s noncurrent
debt and marketable equity securities which are also considered
available-for-sale and recorded at fair value in the Consolidated Statement of
Financial Position.
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
(Dollars in millions)
|
|
Adjusted
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
At September 30, 2013:
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Debt
securities – noncurrent(1)
|
|
$
|
7
|
|
$
|
2
|
|
$
|
—
|
|
$
|
9
|
|
Available-for-sale
equity investments(1)
|
|
$
|
29
|
|
$
|
4
|
|
$
|
1
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Included within investments and sundry assets in the
Consolidated Statement of Financial Position.
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
(Dollars in millions)
|
|
Adjusted
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
At December 31, 2012:
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Debt
securities – noncurrent(1)
|
|
$
|
8
|
|
$
|
2
|
|
$
|
—
|
|
$
|
10
|
|
Available-for-sale
equity investments(1)
|
|
$
|
31
|
|
$
|
4
|
|
$
|
1
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Included within investments and sundry assets in the
Consolidated Statement of Financial Position.
|
|
Based on an evaluation of available evidence as of
September 30, 2013 and December 31, 2012, the company believes that unrealized
losses on debt and available-for-sale equity investments were temporary and did
not represent a need for an other-than-temporary impairment.
Sales of debt and available-for-sale equity investments
during the period were as follows:
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
For the three months ended September 30:
|
|
|
2013
|
|
|
2012
|
|
|
Proceeds
|
|
$
|
8
|
|
$
|
36
|
|
|
Gross
realized gains (before taxes)
|
|
|
5
|
|
|
27
|
|
|
Gross
realized losses (before taxes)
|
|
|
0
|
|
|
—
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
For the nine months ended September 30:
|
|
|
2013
|
|
|
2012
|
|
|
Proceeds
|
|
$
|
28
|
|
$
|
87
|
|
|
Gross
realized gains (before taxes)
|
|
|
9
|
|
|
43
|
|
|
Gross
realized losses (before taxes)
|
|
|
4
|
|
|
0
|
|
The
after-tax net unrealized holding gains/(losses) on available-for-sale debt and
equity securities that have been included in other comprehensive income/(loss)
for the period and after-tax net (gains)/losses reclassified from accumulated
other comprehensive income/(loss) to net income were as follows:
Notes to Consolidated Financial
Statements – (continued)
|
(Dollars in
millions)
|
|
|
|
|
|
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
|
|
Net
unrealized gains/(losses) arising during the period
|
|
$
|
3
|
|
$
|
2
|
|
|
Net
unrealized (gains)/losses reclassified to net income*
|
|
|
(3)
|
|
|
(17)
|
|
|
|
|
|
|
|
|
|
|
|
*There were no writedowns for the three months ended
September 30, 2013 and 2012, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
|
Net
unrealized gains/(losses) arising during the period
|
|
$
|
2
|
|
$
|
20
|
|
|
Net
unrealized (gains)/losses reclassified to net income*
|
|
|
(3)
|
|
|
(26)
|
|
|
|
|
|
|
|
|
|
|
|
* There were no significant writedowns for the nine months
ended September 30, 2013 and 2012, respectively.
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of substantially all available-for-sale debt
securities are less than one year at September 30, 2013.
Derivative
Financial Instruments
The
company operates in multiple functional currencies and is a significant lender
and borrower in the global markets. In the normal course of business, the
company is exposed to the impact of interest rate changes and foreign currency
fluctuations, and to a lesser extent equity and commodity price changes and
client credit risk. The company limits these risks by following established risk
management policies and procedures, including the use of derivatives, and,
where cost effective, financing with debt in the currencies in which assets are
denominated. For interest rate exposures, derivatives are used to better align
rate movements between the interest rates associated with the company’s lease
and other financial assets and the interest rates associated with its financing
debt. Derivatives are also used to manage the related cost of debt. For foreign
currency exposures, derivatives are used to better manage the cash flow
volatility arising from foreign exchange rate fluctuations.
As a
result of the use of derivative instruments, the company is exposed to the risk
that counterparties to derivative contracts will fail to meet their contractual
obligations. To mitigate the counterparty credit risk, the company has a policy
of only entering into contracts with carefully selected major financial
institutions based upon their credit profile. The company’s established
policies and procedures for mitigating credit risk on principal transactions
include reviewing and establishing limits for credit exposure and continually
assessing the creditworthiness of counterparties. The right of set-off that
exists under certain of these arrangements enables the legal entities of the
company subject to the arrangement to net amounts due to and from the counterparty
reducing the maximum loss from credit risk in the event of counterparty
default.
The
company is also a party to collateral security arrangements with most of its
major derivative counterparties. These arrangements require the company to hold
or post collateral (cash or U.S. Treasury securities) when the derivative fair
values exceed contractually established thresholds. Posting thresholds can be
fixed or can vary based on credit default swap pricing or credit ratings
received from the major credit agencies. The aggregate fair value of all
derivative instruments under these collateralized arrangements that were in a
liability position at September 30, 2013 and December 31, 2012 was $222 million
and $94 million, respectively, for which no collateral was posted at September
30, 2013 and December 31, 2012. Full collateralization of these agreements
would be required in the event that the company’s credit rating falls below
investment grade or if its credit default swap spread exceeds 250 basis points,
as applicable, pursuant to the terms of the collateral security arrangements.
The aggregate fair value of derivative instruments in net asset positions as of
September 30, 2013 and December 31, 2012 was $793 million and $918 million, respectively.
This amount represents the maximum exposure to loss at the reporting date as a
result of the counterparties failing to perform as contracted. This exposure
was reduced by $343 million and $262 million at September 30,
2013 and December 31, 2012, respectively, of liabilities included in master
netting arrangements with those counterparties. Additionally, at September 30,
2013 and December 31, 2012, this exposure was reduced by $45 million and $69 million of cash
collateral, respectively, received by the company. At September 30, 2013 and
December 31, 2012, the net exposure related to derivative assets recorded in
the Statement of Financial Position was $404 million and $587 million respectively. At
September 30, 2013 and December 31, 2012, the net amount related to derivative
liabilities recorded in the Statement of Financial Position was $239 million and $242 million, respectively.
In the
Consolidated Statement of Financial Position, the company does not offset
derivative assets against liabilities in master netting arrangements nor does
it offset receivables or payables recognized upon payment or receipt of cash
collateral against the fair values of the related derivative instruments. No
amount was recognized in other receivables at September 30, 2013 or December
31, 2012 for the right to reclaim cash collateral. The amount recognized in
accounts payable for the obligation to return cash collateral totaled $45 million and $69 million at September 30,
2013 and December 31, 2012,
Notes to Consolidated Financial
Statements – (continued)
respectively. The company
restricts the use of cash collateral received to rehypothecation, and therefore
reports it in prepaid expenses and other current assets in the Consolidated
Statement of Financial Position. No amount was rehypothecated at September 30,
2013 or at December 31, 2012. Additionally, the company’s exposure is further
reduced by holding non-cash collateral. At September 30, 2013, no amounts of
non-cash collateral were held, and at December 31, 2012, $31 million was held
in U.S. Treasury securities. Per accounting guidance, non-cash collateral is
not recorded on the Statement of Financial Position.
The
company may employ derivative instruments to hedge the volatility in
stockholders’ equity resulting from changes in currency exchange rates of
significant foreign subsidiaries of the company with respect to the U.S.
dollar. These instruments, designated as net investment hedges, expose the
company to liquidity risk as the derivatives have an immediate cash flow impact
upon maturity which is not offset by a cash flow from the translation of the
underlying hedged equity. The company monitors this cash loss potential on an
ongoing basis and may discontinue some of these hedging relationships by de-designating
or terminating the derivative instrument in order to manage the liquidity risk.
Although not designated as accounting hedges, the company may utilize
derivatives to offset the changes in the fair value of the de-designated
instruments from the date of de-designation until maturity.
In its
hedging programs, the company uses forward contracts, futures contracts,
interest-rate swaps and cross-currency swaps, depending upon the underlying
exposure. The company is not a party to leveraged derivative instruments.
A brief
description of the major hedging programs, categorized by underlying risk,
follows.
Interest
Rate Risk
Fixed and
Variable Rate Borrowings
The
company issues debt in the global capital markets, principally to fund its
financing lease and loan portfolios. Access to cost-effective financing can
result in interest rate mismatches with the underlying assets. To manage these
mismatches and to reduce overall interest cost, the company uses interest-rate
swaps to convert specific fixed-rate debt issuances into variable-rate debt
(i.e., fair value hedges) and to convert specific variable-rate debt issuances
into fixed-rate debt (i.e., cash flow hedges). At September 30, 2013 and
December 31, 2012, the total notional amount of the company’s interest rate
swaps was $4.5 billion
and $4.3 billion,
respectively. The weighted-average remaining maturity of these instruments at
September 30, 2013 and December 31, 2012 was approximately 7.5 years and 5.1
years, respectively.
Forecasted
Debt Issuance
The
company is exposed to interest rate volatility on future debt issuances. To
manage this risk, the company may use forward starting interest-rate swaps to
lock in the rate on the interest payments related to the forecasted debt
issuance. These swaps are accounted for as cash flow hedges. The company did
not have any derivative instruments relating to this program outstanding at
September 30, 2013 and December 31, 2012.
At
September 30, 2013 and December 31, 2012, net gains of approximately $1 million (before taxes),
respectively, were recorded in accumulated other comprehensive income/(loss) in
connection with cash flow hedges of the company’s borrowings. Within these
amounts, gains of less than $1 million, respectively, are
expected to be reclassified to net income within the next 12 months, providing
an offsetting economic impact against the underlying transactions.
Foreign
Exchange Risk
Long-Term
Investments in Foreign Subsidiaries (Net Investment)
A large
portion of the company’s foreign currency denominated debt portfolio is
designated as a hedge of net investment in foreign subsidiaries to reduce the
volatility in stockholders’ equity caused by changes in foreign currency
exchange rates in the functional currency of major foreign subsidiaries with
respect to the U.S. dollar. The company also uses cross-currency swaps and
foreign exchange forward contracts for this risk management purpose. At
September 30, 2013 and December 31, 2012, the total notional amount of
derivative instruments designated as net investment hedges was $5.3 billion and $3.3 billion, respectively. The
weighted-average remaining maturity of these instruments at September 30, 2013
and December 31, 2012 was approximately 0.2 years and 0.4 years, respectively.
Notes to Consolidated Financial
Statements – (continued)
Anticipated Royalties and Cost Transactions
The
company’s operations generate significant nonfunctional currency, third-party
vendor payments and intercompany payments for royalties and goods and services
among the company’s non-U.S. subsidiaries and with the parent company. In
anticipation of these foreign currency cash flows and in view of the volatility
of the currency markets, the company selectively employs foreign exchange
forward contracts to manage its currency risk. These forward contracts are
accounted for as cash flow hedges. The maximum length of time over which the
company is hedging its exposure to the variability in future cash flows is four
years. At September 30, 2013 and December 31, 2012, the total notional amount
of forward contracts designated as cash flow hedges of forecasted royalty and cost
transactions was $10.7 billion
and $10.7 billion,
respectively, with a weighted-average remaining maturity of 0.7 years and 0.7
years, respectively.
At
September 30, 2013 and December 31, 2012, in connection with cash flow hedges
of anticipated royalties and cost transactions, the company recorded net losses
of $326 million and net
losses of $138 million
(before taxes), respectively, in accumulated other comprehensive income/(loss).
Within these amounts, $197
million of losses and $79
million of losses, respectively, are expected to be reclassified to net income
within the next 12 months, providing an offsetting economic impact against the
underlying anticipated transactions.
Foreign
Currency Denominated Borrowings
The
company is exposed to exchange rate volatility on foreign currency denominated
debt. To manage this risk, the company employs cross-currency swaps to convert
fixed-rate foreign currency denominated debt to fixed-rate debt denominated in
the functional currency of the borrowing entity. These swaps are accounted for
as cash flow hedges. At September 30, 2013 and December 31, 2012, no
instruments relating to this program were outstanding.
Subsidiary
Cash and Foreign Currency Asset/Liability Management
The
company uses its Global Treasury Centers to manage the cash of its subsidiaries.
These centers principally use currency swaps to convert cash flows in a
cost-effective manner. In addition, the company uses foreign exchange forward
contracts to economically hedge, on a net basis, the foreign currency exposure
of a portion of the company’s nonfunctional currency assets and liabilities.
The terms of these forward and swap contracts are generally less than one year.
The changes in the fair values of these contracts and of the underlying hedged
exposures are generally offsetting and are recorded in other (income) and
expense in the Consolidated Statement of Earnings. At September 30, 2013 and
December 31, 2012, the total notional amount of derivative instruments in
economic hedges of foreign currency exposure was $14.6 billion and $12.9 billion, respectively.
Equity Risk
Management
The
company is exposed to market price changes in certain broad market indices and
in the company’s own stock primarily related to certain obligations to
employees. Changes in the overall value of these employee compensation
obligations are recorded in selling, general and administrative (SG&A)
expense in the Consolidated Statement of Earnings. Although not designated as
accounting hedges, the company utilizes derivatives, including equity swaps and
futures, to economically hedge the exposures related to its employee
compensation obligations. The derivatives are linked to the total return on
certain broad market indices or the total return on the company’s common stock.
They are recorded at fair value with gains or losses also reported in SG&A
expense in the Consolidated Statement of Earnings. At September 30, 2013 and
December 31, 2012, the total notional amount of derivative instruments in economic
hedges of these compensation obligations was $1.2 billion for both periods.
Other Risks
The company
may hold warrants to purchase shares of common stock in connection with various
investments that are deemed derivatives because they contain net share or net
cash settlement provisions. The company records the changes in the fair value
of these warrants in other (income) and expense in the Consolidated Statement
of Earnings. The company did not have any warrants qualifying as derivatives
outstanding at September 30, 2013 and December 31, 2012.
The
company is exposed to a potential loss if a client fails to pay amounts due
under contractual terms. The company utilizes credit default swaps to economically
hedge its credit exposures. The swaps are recorded at fair value with gains and
losses reported in other (income) and expense in the Consolidated Statement of
Earnings. The company did not have any derivative instruments relating to this
program outstanding at September 30, 2013 and December 31, 2012.
Notes to Consolidated Financial
Statements – (continued)
The following tables provide a quantitative summary
of the derivative and non-derivative instrument related risk management
activity as of September 30, 2013 and December 31, 2012 as well as for the
three and nine months ended September 30, 2013 and 2012, respectively:
|
Fair Values of Derivative Instruments in
the Consolidated Statement of Financial Position
|
|
As of September 30, 2013 and December 31,
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Fair Value of Derivative Assets
|
|
Fair Value of Derivative Liabilities
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
Classification
|
|
9/30/2013
|
|
12/31/2012
|
|
Classification
|
|
9/30/2013
|
|
12/31/2012
|
|
Designated as hedging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts:
|
Prepaid
expenses and
|
|
|
|
|
|
|
|
Other
accrued
|
|
|
|
|
|
|
|
|
other
current assets
|
|
$
|
41
|
|
$
|
47
|
|
expenses
and liabilities
|
|
$
|
—
|
|
$
|
—
|
|
|
Investments
and sundry
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
|
|
|
371
|
|
|
557
|
|
Other
liabilities
|
|
|
—
|
|
|
—
|
|
Foreign exchange
|
Prepaid
expenses and
|
|
|
|
|
|
|
|
Other
accrued
|
|
|
|
|
|
|
|
contracts:
|
other
current assets
|
|
|
138
|
|
|
135
|
|
expenses
and liabilities
|
|
|
378
|
|
|
267
|
|
|
Investments
and sundry
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
|
|
|
—
|
|
|
5
|
|
Other
liabilities
|
|
|
150
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivative
|
|
|
|
|
|
|
|
|
Fair value of derivative
|
|
|
|
|
|
|
|
assets
|
|
|
$
|
550
|
|
$
|
744
|
|
liabilities
|
|
$
|
528
|
|
$
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not designated as
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
|
Prepaid
expenses and
|
|
|
|
|
|
|
|
Other
accrued
|
|
|
|
|
|
|
|
contracts:
|
other
current assets
|
|
$
|
208
|
|
$
|
142
|
|
expenses
and liabilities
|
|
$
|
47
|
|
$
|
152
|
|
|
Investments
and sundry
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
|
|
|
25
|
|
|
23
|
|
Other
liabilities
|
|
|
—
|
|
|
—
|
|
Equity contracts:
|
Prepaid
expenses and
|
|
|
|
|
|
|
|
Other
accrued
|
|
|
|
|
|
|
|
|
other
current assets
|
|
|
9
|
|
|
9
|
|
expenses
and liabilities
|
|
|
7
|
|
|
7
|
|
Fair value of derivative
|
|
|
|
|
|
|
|
|
Fair value of derivative
|
|
|
|
|
|
|
|
assets
|
|
|
$
|
242
|
|
$
|
174
|
|
liabilities
|
|
$
|
53
|
|
$
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt designated as
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
|
N/A
|
|
|
N/A
|
|
|
|
$
|
1,219
|
|
$
|
578
|
|
|
Long-term
debt
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
2,297
|
|
|
3,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
793
|
|
$
|
918
|
|
|
|
$
|
4,097
|
|
$
|
4,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A-not applicable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial
Statements – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments in
the Consolidated Statement of Earnings
|
|
For the three months ended September 30,
2013 and 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Gain (Loss) Recognized in
Earnings
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of
|
|
Recognized on
|
|
Attributable to Risk
|
|
|
|
|
Earnings Line Item
|
|
Derivatives(1)
|
|
Being Hedged(2)
|
|
For the three months ended September 30:
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Derivative instruments in fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
Cost
of financing
|
|
$
|
5
|
|
$
|
13
|
|
$
|
19
|
|
$
|
19
|
|
|
|
|
Interest
expense
|
|
|
3
|
|
|
11
|
|
|
12
|
|
|
16
|
|
Derivative instruments not designated as
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedging instruments(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts
|
|
Other
(income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
expense
|
|
|
254
|
|
|
148
|
|
|
N/A
|
|
|
N/A
|
|
Equity
contracts
|
|
SG&A
expense
|
|
|
46
|
|
|
54
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
308
|
|
$
|
226
|
|
$
|
31
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in
Earnings and Other Comprehensive Income
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
(Ineffectiveness) and
|
|
|
|
|
Effective Portion
|
|
Statement of
|
|
Effective Portion
Reclassified
|
|
Amounts Excluded from
|
|
|
|
|
Recognized in OCI
|
|
Earnings Line Item
|
|
from AOCI
|
|
Effectiveness Testing(3)
|
|
For the three months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended September 30:
|
|
2013
|
|
2012
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$
|
—
|
|
$
|
—
|
|
Interest
expense
|
|
$
|
—
|
|
$
|
(2)
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Other
(income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
|
|
|
(409)
|
|
|
(54)
|
|
and
expense
|
|
|
30
|
|
|
102
|
|
|
0
|
|
|
0
|
|
|
contracts
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
(17)
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
SG&A
expense
|
|
|
13
|
|
|
5
|
|
|
—
|
|
|
—
|
|
Instruments in net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment hedges(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contracts
|
|
|
(223)
|
|
|
(136)
|
|
Interest
expense
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(632)
|
|
$
|
(190)
|
|
|
|
$
|
27
|
|
$
|
112
|
|
$
|
1
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A-not applicable
Note: AOCI represents Accumulated other comprehensive
income/(loss) in the Consolidated Statement of Changes in Equity.
(1)
The amount includes changes in clean
fair values of the derivative instruments in fair value hedging relationships
and the periodic accrual for coupon payments required under these derivative
contracts.
(2)
The amount includes basis
adjustments to the carrying value of the hedged item recorded during the period
and amortization of basis adjustments recorded on de-designated hedging
relationships during the period.
(3)
The amount of gain (loss)
recognized in income represents ineffectiveness on hedge relationships.
(4)
Instruments in net investment hedges
include derivative and non-derivative instruments.
Notes to Consolidated Financial
Statements – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments in
the Consolidated Statement of Earnings
|
|
For the nine months ended September 30,
2013 and 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Gain (Loss) Recognized in
Earnings
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of
|
|
Recognized on
|
|
Attributable to Risk
|
|
|
|
|
Earnings Line Item
|
|
Derivatives(1)
|
|
Being Hedged(2)
|
|
For the nine months ended September 30:
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Derivative instruments in fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
Cost
of financing
|
|
$
|
(82)
|
|
$
|
68
|
|
$
|
156
|
|
$
|
27
|
|
|
|
|
Interest
expense
|
|
|
(53)
|
|
|
58
|
|
|
101
|
|
|
23
|
|
Derivative instruments not designated as
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedging instruments(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts
|
|
Other
(income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
expense
|
|
|
(265)
|
|
|
(56)
|
|
|
N/A
|
|
|
N/A
|
|
Equity
contracts
|
|
SG&A
expense
|
|
|
105
|
|
|
116
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(295)
|
|
$
|
186
|
|
$
|
257
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in
Earnings and Other Comprehensive Income
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
(Ineffectiveness) and
|
|
|
|
|
Effective Portion
|
|
Statement of
|
|
Effective Portion
Reclassified
|
|
Amounts Excluded from
|
|
|
|
|
Recognized in OCI
|
|
Earnings Line Item
|
|
from AOCI
|
|
Effectiveness Testing(3)
|
|
For the nine months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended September 30:
|
|
2013
|
|
2012
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$
|
—
|
|
$
|
—
|
|
Interest
expense
|
|
$
|
—
|
|
$
|
(6)
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Other
(income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
|
|
|
(59)
|
|
|
65
|
|
and
expense
|
|
|
115
|
|
|
209
|
|
|
(0)
|
|
|
3
|
|
|
contracts
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
(15)
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
SG&A
expense
|
|
|
29
|
|
|
21
|
|
|
—
|
|
|
—
|
|
Instruments in net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment hedges(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contracts
|
|
|
58
|
|
|
(23)
|
|
Interest
expense
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1)
|
|
$
|
42
|
|
|
|
$
|
129
|
|
$
|
246
|
|
$
|
3
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A-not applicable
Note: AOCI represents Accumulated other comprehensive
income/(loss) in the Consolidated Statement of Changes in Equity.
(1)
The amount includes
changes in clean fair values of the derivative instruments in fair value
hedging relationships and the periodic accrual for coupon payments required
under these derivative contracts.
(2)
The amount includes
basis adjustments to the carrying value of the hedged item recorded during the
period and amortization of basis adjustments recorded on de-designated hedging
relationships during the period.
(3)
The amount of gain
(loss) recognized in income represents ineffectiveness on hedge relationships.
(4)
Instruments in net
investment hedges include derivative and non-derivative instruments.
For the three and nine months ending September
30, 2013 and 2012, there were no significant gains or losses recognized in
earnings representing hedge ineffectiveness or excluded from the assessment of
hedge effectiveness (for fair value hedges), or associated with an underlying
exposure that did not or was not expected to occur (for cash flow hedges); nor
are there any anticipated in the normal course of business.
Refer to the company’s 2012 Annual Report, Note
A, “Significant Accounting Policies,” on page 83 for additional
information on the company’s use of derivative financial instruments.
Notes to Consolidated Financial
Statements – (continued)
4.
Financing Receivables: The following table presents financing receivables, net of
allowances for credit losses, including residual values.
|
|
|
At September 30,
|
|
At December 31,
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
Current:
|
|
|
|
|
|
|
|
Net
investment in sales-type and direct financing leases
|
|
$
|
4,078
|
|
$
|
3,862
|
|
Commercial
financing receivables
|
|
|
6,278
|
|
|
7,750
|
|
Client
loan receivables
|
|
|
5,218
|
|
|
5,395
|
|
Installment
payment receivables
|
|
|
1,212
|
|
|
1,031
|
|
Total
|
|
$
|
16,786
|
|
$
|
18,038
|
|
Noncurrent:
|
|
|
|
|
|
|
|
Net
investment in sales-type and direct financing leases
|
|
$
|
5,454
|
|
$
|
6,107
|
|
Commercial
financing receivables
|
|
|
—
|
|
|
5
|
|
Client
loan receivables
|
|
|
5,555
|
|
|
5,966
|
|
Installment
payment receivables
|
|
|
666
|
|
|
733
|
|
Total
|
|
$
|
11,675
|
|
$
|
12,812
|
Net investment in sales-type and direct financing leases relates principally to
the company’s systems products and are for terms ranging generally from two to
six years. Net investment in sales-type and direct financing leases includes unguaranteed
residual values of $734
million and $794 million
at September 30, 2013 and December 31, 2012, respectively, and is reflected net
of unearned income of $676
million and $728
million, and net of the allowance for credit losses of $106 million and $114 million at those dates,
respectively.
Commercial financing receivables, net of allowance
for credit losses of $27
million and $46 million
at September 30, 2013 and December 31, 2012, respectively, relate primarily to
inventory and accounts receivable financing for dealers and remarketers of IBM
and OEM products. Payment terms for inventory and accounts receivable financing
generally range from 30 to 90 days.
Client
loan receivables, net of allowance for credit losses of $182 million and $155 million at September 30,
2013 and December 31, 2012, respectively, are loans that are provided primarily
to clients to finance the purchase of software and services. Separate
contractual relationships on these financing arrangements are for terms ranging
generally from one to seven years.
Installment payment receivables, net of allowance
for credit losses of $36
million and $39 million
at September 30, 2013 and December 31, 2012, respectively, are loans that are
provided primarily to clients to finance hardware, software and services
ranging generally from one to three years.
Client loan receivables and installment payment
receivables financing contracts are priced independently at competitive market
rates. The company has a history of enforcing the terms of these separate
financing agreements.
The company utilizes certain of its financing
receivables as collateral for non-recourse borrowings. Financing receivables
pledged as collateral for borrowings were $701 million and $650 million at September 30,
2013 and December 31, 2012, respectively.
The company did not have any financing receivables
held for sale as of September 30, 2013 and December 31, 2012.
Financing Receivables by Portfolio Segment
The following tables present financing receivables on a gross
basis, excluding the allowance for credit losses and residual value, by
portfolio segment and by class, excluding current commercial financing
receivables and other miscellaneous current financing receivables at September
30, 2013 and December 31, 2012. The company determines its allowance for credit
losses based on two portfolio segments: lease receivables and loan receivables,
and further segments the portfolio into two classes: major markets and growth
markets. For additional information on the company’s accounting policies for
the allowance for credit losses, see the company’s 2012 Annual Report beginning
on page 85.
Notes to Consolidated Financial
Statements – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Major
|
|
Growth
|
|
|
|
|
At September 30, 2013
|
|
Markets
|
|
Markets
|
|
Total
|
|
Financing
receivables:
|
|
|
|
|
|
|
|
|
|
|
|
Lease
receivables
|
|
$
|
6,705
|
|
$
|
2,104
|
|
$
|
8,809
|
|
|
Loan
receivables
|
|
|
9,042
|
|
|
3,830
|
|
|
12,871
|
|
Ending
balance
|
|
$
|
15,747
|
|
$
|
5,934
|
|
$
|
21,681
|
|
Collectively
evaluated for impairment
|
|
$
|
15,629
|
|
$
|
5,767
|
|
$
|
21,395
|
|
Individually
evaluated for impairment
|
|
$
|
118
|
|
$
|
167
|
|
$
|
285
|
|
Allowance
for credit losses:
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance at January 1, 2013
|
|
|
|
|
|
|
|
|
|
|
|
Lease
receivables
|
|
$
|
59
|
|
$
|
55
|
|
$
|
114
|
|
|
Loan
receivables
|
|
|
121
|
|
|
84
|
|
|
204
|
|
Total
|
|
$
|
180
|
|
$
|
138
|
|
$
|
318
|
|
|
Write-offs
|
|
|
(21)
|
|
|
(9)
|
|
|
(30)
|
|
|
Provision
|
|
|
(26)
|
|
|
66
|
|
|
40
|
|
|
Other
|
|
|
—
|
|
|
(4)
|
|
|
(4)
|
|
Ending
balance at September 30, 2013
|
|
$
|
134
|
|
$
|
190
|
|
$
|
324
|
|
|
Lease
receivables
|
|
$
|
42
|
|
$
|
64
|
|
$
|
106
|
|
|
Loan
receivables
|
|
$
|
92
|
|
$
|
126
|
|
$
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated for impairment
|
|
$
|
40
|
|
$
|
37
|
|
$
|
77
|
|
Individually
evaluated for impairment
|
|
$
|
94
|
|
$
|
153
|
|
$
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Major
|
|
Growth
|
|
|
|
|
At December 31, 2012
|
|
Markets
|
|
Markets
|
|
Total
|
|
Financing
receivables:
|
|
|
|
|
|
|
|
|
|
|
|
Lease
receivables
|
|
$
|
7,036
|
|
$
|
2,138
|
|
$
|
9,174
|
|
|
Loan
receivables
|
|
|
9,666
|
|
|
3,670
|
|
|
13,336
|
|
Ending
balance
|
|
$
|
16,701
|
|
$
|
5,808
|
|
$
|
22,510
|
|
Collectively
evaluated for impairment
|
|
$
|
16,570
|
|
$
|
5,684
|
|
$
|
22,254
|
|
Individually
evaluated for impairment
|
|
$
|
131
|
|
$
|
125
|
|
$
|
256
|
|
Allowance
for credit losses:
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance at January 1, 2012
|
|
|
|
|
|
|
|
|
|
|
|
Lease
receivables
|
|
$
|
79
|
|
$
|
40
|
|
$
|
118
|
|
|
Loan
receivables
|
|
|
125
|
|
|
64
|
|
|
189
|
|
Total
|
|
$
|
203
|
|
$
|
104
|
|
$
|
307
|
|
|
Write-offs
|
|
|
(14)
|
|
|
(1)
|
|
|
(15)
|
|
|
Provision
|
|
|
(9)
|
|
|
38
|
|
|
28
|
|
|
Other
|
|
|
0
|
|
|
(2)
|
|
|
(2)
|
|
Ending
balance at December 31, 2012
|
|
$
|
180
|
|
$
|
138
|
|
$
|
318
|
|
|
Lease
receivables
|
|
$
|
59
|
|
$
|
55
|
|
$
|
114
|
|
|
Loan
receivables
|
|
$
|
121
|
|
$
|
84
|
|
$
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated for impairment
|
|
$
|
69
|
|
$
|
29
|
|
$
|
98
|
|
Individually
evaluated for impairment
|
|
$
|
111
|
|
$
|
109
|
|
$
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
When determining the allowances, financing receivables are
evaluated either on an individual or a collective basis. For individually
evaluated receivables, the company determines the expected cash flow for the receivable
and calculates an estimate of the potential loss and the probability of loss.
For those accounts in which the loss is probable, the company records a
specific reserve. In addition, the company records an unallocated reserve that
is determined by applying a reserve rate to its different portfolios, excluding
accounts that have been specifically reserved. This reserve rate is based upon
credit rating, probability
of default, term, characteristics (lease/loan) and loss history.
Notes to Consolidated Financial
Statements – (continued)
Financing Receivables
on Non-Accrual Status
Certain
receivables for which the company has recorded a specific reserve may also be
placed on non-accrual status. Non-accrual assets are those receivables with
specific reserves and other accounts for which it is likely
that the company will be unable to collect all amounts due according to
original terms of the lease or loan agreement. Income recognition is
discontinued on these receivables.
The following
table presents the recorded investment in financing receivables which were on
non-accrual status at September 30, 2013 and December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
At December 31,
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
Major
markets
|
|
$
|
21
|
|
$
|
27
|
|
Growth
markets
|
|
|
24
|
|
|
21
|
|
Total
lease receivables
|
|
$
|
45
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
Major
markets
|
|
$
|
48
|
|
$
|
67
|
|
Growth
markets
|
|
|
79
|
|
|
25
|
|
Total
loan receivables
|
|
$
|
127
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
Total
receivables
|
|
$
|
172
|
|
$
|
139
|
|
|
|
|
|
|
|
|
Impaired Loans
The company considers any loan with an individually evaluated
reserve as an impaired loan. Depending on the level of impairment, loans will
also be placed on non-accrual status.
The following tables present impaired client loan receivables.
|
|
|
At September 30, 2013
|
|
At December 31, 2012
|
|
|
|
Recorded
|
|
Related
|
|
Recorded
|
|
Related
|
|
(Dollars in
millions)
|
|
Investment
|
|
Allowance
|
|
Investment
|
|
Allowance
|
|
Major markets
|
|
$
|
74
|
|
$
|
68
|
|
$
|
88
|
|
$
|
77
|
|
Growth markets
|
|
|
109
|
|
|
102
|
|
|
72
|
|
|
65
|
|
Total
|
|
$
|
183
|
|
$
|
170
|
|
$
|
160
|
|
$
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
Average
|
|
Interest
|
|
Income
|
|
(Dollars in
millions)
|
|
Recorded
|
|
Income
|
|
Recognized on
|
|
For the three
months ended September 30, 2013:
|
|
Investment
|
|
Recognized
|
|
Cash Basis
|
|
Major markets
|
|
$
|
73
|
|
$
|
0
|
|
$
|
0
|
|
Growth markets
|
|
|
102
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
174
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
Average
|
|
Interest
|
|
Income
|
|
(Dollars in
millions)
|
|
Recorded
|
|
Income
|
|
Recognized on
|
|
For the three
months ended September 30, 2012:
|
|
Investment
|
|
Recognized
|
|
Cash Basis
|
|
Major markets
|
|
$
|
84
|
|
$
|
0
|
|
$
|
0
|
|
Growth markets
|
|
|
63
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
147
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial
Statements – (continued)
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
Average
|
|
Interest
|
|
Income
|
|
(Dollars in millions)
|
|
Recorded
|
|
Income
|
|
Recognized on
|
|
For the nine months ended September 30, 2013:
|
|
Investment
|
|
Recognized
|
|
Cash Basis
|
|
Major
markets
|
|
$
|
76
|
|
$
|
0
|
|
$
|
0
|
|
Growth
markets
|
|
|
90
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
166
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
Average
|
|
Interest
|
|
Income
|
|
(Dollars in millions)
|
|
Recorded
|
|
Income
|
|
Recognized on
|
|
For the nine months ended September 30, 2012:
|
|
Investment
|
|
Recognized
|
|
Cash Basis
|
|
Major
markets
|
|
$
|
91
|
|
$
|
0
|
|
$
|
0
|
|
Growth
markets
|
|
|
64
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
154
|
|
$
|
0
|
|
$
|
0
|
Credit Quality Indicators
The company’s credit quality indicators, which are based on rating
agency data, publicly available information and information provided by
customers, are reviewed periodically based on the relative level of risk. The
resulting indicators are a numerical rating system that maps to Standard &
Poor’s Ratings Services credit ratings as shown below. Standard & Poor’s
does not provide credit ratings to the company on its customers.
The following tables present the gross recorded investment for
each class of receivables, by credit quality indicator, at September 30, 2013
and December 31, 2012. Receivables with a credit quality indicator ranging from
AAA to BBB- are considered investment grade. All others are considered
non-investment grade. The credit quality indicators do not reflect mitigation
actions that the company may take to transfer credit risk to third parties.
|
|
|
|
Lease Receivables
|
|
Loan Receivables
|
|
(Dollars in millions)
|
|
Major
|
|
Growth
|
|
Major
|
|
Growth
|
|
At September 30, 2013:
|
|
Markets
|
|
Markets
|
|
Markets
|
|
Markets
|
|
Credit
Rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
– AA-
|
|
$
|
606
|
|
$
|
71
|
|
$
|
817
|
|
$
|
129
|
|
|
A+
– A-
|
|
|
1,520
|
|
|
178
|
|
|
2,049
|
|
|
324
|
|
|
BBB+
– BBB-
|
|
|
2,154
|
|
|
875
|
|
|
2,904
|
|
|
1,593
|
|
|
BB+
– BB
|
|
|
1,421
|
|
|
306
|
|
|
1,916
|
|
|
557
|
|
|
BB-
– B+
|
|
|
533
|
|
|
412
|
|
|
719
|
|
|
750
|
|
|
B
– B-
|
|
|
356
|
|
|
198
|
|
|
480
|
|
|
361
|
|
|
CCC+
– D
|
|
|
115
|
|
|
64
|
|
|
155
|
|
|
116
|
|
Total
|
|
$
|
6,705
|
|
$
|
2,104
|
|
$
|
9,042
|
|
$
|
3,830
|
At September 30, 2013, the industries which made up Global
Financing’s receivables portfolio consisted of: Financial (38 percent), Government (15 percent), Manufacturing
(14 percent), Retail (8 percent), Services (7 percent), Communications
(7 percent), Healthcare
(6 percent) and Other (4 percent).
Notes to Consolidated Financial
Statements – (continued)
|
|
|
|
Lease Receivables
|
|
Loan Receivables
|
|
(Dollars in millions)
|
|
Major
|
|
Growth
|
|
Major
|
|
Growth
|
|
At December 31, 2012:
|
|
Markets
|
|
Markets
|
|
Markets
|
|
Markets
|
|
Credit
Rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
– AA-
|
|
$
|
646
|
|
$
|
86
|
|
$
|
887
|
|
$
|
148
|
|
|
A+
– A-
|
|
|
1,664
|
|
|
223
|
|
|
2,286
|
|
|
382
|
|
|
BBB+
– BBB-
|
|
|
2,285
|
|
|
776
|
|
|
3,139
|
|
|
1,333
|
|
|
BB+
– BB
|
|
|
1,367
|
|
|
450
|
|
|
1,878
|
|
|
773
|
|
|
BB-
– B+
|
|
|
552
|
|
|
418
|
|
|
758
|
|
|
718
|
|
|
B
– B-
|
|
|
399
|
|
|
127
|
|
|
548
|
|
|
218
|
|
|
CCC+
– D
|
|
|
124
|
|
|
58
|
|
|
170
|
|
|
99
|
|
Total
|
|
$
|
7,036
|
|
$
|
2,138
|
|
$
|
9,666
|
|
$
|
3,670
|
At December
31, 2012, the industries which made up Global Financing’s receivables portfolio
consisted of: Financial (38
percent), Government (16
percent), Manufacturing (14
percent), Retail (9
percent), Services (7
percent), Healthcare (6
percent), Communications (6
percent) and Other (4
percent).
Past Due Financing Receivables
The company views receivables as past due when payment has not
been received after 90 days, measured from the billing date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
Total
|
|
|
|
|
Total
|
|
Investment
|
|
(Dollars in millions)
|
|
Past Due
|
|
|
|
|
Financing
|
|
> 90 Days
|
|
At September 30, 2013:
|
|
> 90 days*
|
|
Current
|
|
Receivables
|
|
and Accruing
|
|
Major
markets
|
|
$
|
9
|
|
$
|
6,696
|
|
$
|
6,705
|
|
$
|
9
|
|
Growth
markets
|
|
|
16
|
|
|
2,089
|
|
|
2,104
|
|
|
11
|
|
Total
lease receivables
|
|
$
|
25
|
|
$
|
8,785
|
|
$
|
8,809
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major
markets
|
|
$
|
15
|
|
$
|
9,027
|
|
$
|
9,042
|
|
$
|
14
|
|
Growth
markets
|
|
|
29
|
|
|
3,801
|
|
|
3,830
|
|
|
10
|
|
Total
loan receivables
|
|
$
|
43
|
|
$
|
12,828
|
|
$
|
12,871
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
68
|
|
$
|
21,612
|
|
$
|
21,681
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Does not include accounts that are fully reserved.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
Total
|
|
|
|
|
Total
|
|
Investment
|
|
(Dollars in millions)
|
|
Past Due
|
|
|
|
|
Financing
|
|
> 90 Days
|
|
At December 31, 2012:
|
|
> 90 days*
|
|
Current
|
|
Receivables
|
|
and Accruing
|
|
Major
markets
|
|
$
|
8
|
|
$
|
7,028
|
|
$
|
7,036
|
|
$
|
5
|
|
Growth
markets
|
|
|
11
|
|
|
2,127
|
|
|
2,138
|
|
|
8
|
|
Total
lease receivables
|
|
$
|
20
|
|
$
|
9,154
|
|
$
|
9,174
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major
markets
|
|
$
|
27
|
|
$
|
9,639
|
|
$
|
9,666
|
|
$
|
8
|
|
Growth
markets
|
|
|
36
|
|
|
3,634
|
|
|
3,670
|
|
|
31
|
|
Total
loan receivables
|
|
$
|
63
|
|
$
|
13,273
|
|
$
|
13,336
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
82
|
|
$
|
22,428
|
|
$
|
22,510
|
|
$
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Does not include accounts that are fully reserved.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial
Statements – (continued)
Troubled Debt Restructurings
The company did not have any troubled debt restructurings during the nine
months ended September 30, 2013 and for the year ended December 31, 2012.
5. Stock-Based Compensation: Stock-based compensation cost is measured
at grant date, based on the fair value of the award, and is recognized over the
employee requisite service period. The following table presents total
stock-based compensation cost included in the Consolidated Statement of
Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Cost
|
|
$
|
27
|
|
$
|
34
|
|
$
|
89
|
|
$
|
99
|
|
Selling,
general and administrative
|
|
|
110
|
|
|
133
|
|
|
324
|
|
|
370
|
|
Research,
development and engineering
|
|
|
12
|
|
|
15
|
|
|
42
|
|
|
43
|
|
Other
(income) and expense
|
|
|
—
|
|
|
0
|
|
|
—
|
|
|
0
|
|
Pre-tax
stock-based compensation cost
|
|
|
150
|
|
|
183
|
|
|
455
|
|
|
510
|
|
Income
tax benefits
|
|
|
(52)
|
|
|
(64)
|
|
|
(157)
|
|
|
(179)
|
|
Total
stock-based compensation cost
|
|
$
|
98
|
|
$
|
119
|
|
$
|
297
|
|
$
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease
in pre-tax stock-based compensation cost for the three months ended September
30, 2013, as compared to the corresponding period in the prior year, was due to
decreases related to performance share units ($23 million), restricted stock
units ($7 million) and
the company’s assumption of stock-based awards previously issued by acquired
entities ($4 million).
The decrease in pre-tax stock-based compensation cost for the nine months ended
September 30, 2013, as compared to the corresponding period in the prior year,
was due to decreases related to performance share units ($34 million), the company’s
assumption of stock-based awards previously issued by acquired entities ($11
million) and restricted stock units ($12 million).
As of
September 30, 2013, the total unrecognized compensation cost of $1,088 million related to
non-vested awards is expected to be recognized over a weighted-average period
of approximately 2.5 years.
There
was no significant capitalized stock-based compensation cost at September 30,
2013 and 2012.
6. Segments: The tables on pages 26 and 27 reflect
the results of operations of the company’s segments consistent with the
management and measurement system utilized within the company. Performance
measurement is based on pre-tax income. These results are used, in part, by
senior management, both in evaluating the performance of, and in allocating
resources to, each of the segments.
Notes to Consolidated Financial
Statements – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEGMENT INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
Business
|
|
|
|
|
Systems and
|
|
Global
|
|
Total
|
|
|
(Dollars in millions)
|
|
Services
|
|
Services
|
|
Software
|
|
Technology
|
|
Financing
|
|
Segments
|
|
|
For the three months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenue
|
|
$
|
9,494
|
|
$
|
4,558
|
|
$
|
5,798
|
|
$
|
3,247
|
|
$
|
502
|
|
$
|
23,599
|
|
|
Internal
revenue
|
|
|
262
|
|
|
177
|
|
|
744
|
|
|
168
|
|
|
512
|
|
|
1,863
|
|
|
Total
revenue
|
|
$
|
9,755
|
|
$
|
4,735
|
|
$
|
6,542
|
|
$
|
3,415
|
|
$
|
1,015
|
|
$
|
25,461
|
|
|
Pre-tax
income
|
|
$
|
1,895
|
|
$
|
948
|
|
$
|
2,410
|
|
$
|
(167)
|
|
$
|
494
|
|
$
|
5,579
|
|
|
Revenue
year-to-year change
|
|
|
(4.4)
|
%
|
|
0.4
|
%
|
|
(1.0)
|
%
|
|
(16.2)
|
%
|
|
5.3
|
%
|
|
(4.2)
|
%
|
|
Pre-tax
income year-to-year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
change
|
|
|
11.7
|
%
|
|
28.4
|
%
|
|
2.3
|
%
|
|
nm
|
|
|
3.8
|
%
|
|
3.5
|
%
|
|
Pre-tax
income margin
|
|
|
19.4
|
%
|
|
20.0
|
%
|
|
36.8
|
%
|
|
(4.9)
|
%
|
|
48.7
|
%
|
|
21.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm - not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenue
|
|
$
|
9,922
|
|
$
|
4,542
|
|
$
|
5,763
|
|
$
|
3,895
|
|
$
|
472
|
|
$
|
24,594
|
|
|
Internal
revenue
|
|
|
285
|
|
|
175
|
|
|
843
|
|
|
181
|
|
|
491
|
|
|
1,976
|
|
|
Total
revenue
|
|
$
|
10,206
|
|
$
|
4,717
|
|
$
|
6,606
|
|
$
|
4,076
|
|
$
|
963
|
|
$
|
26,570
|
|
|
Pre-tax
income
|
|
$
|
1,697
|
|
$
|
738
|
|
$
|
2,355
|
|
$
|
124
|
|
$
|
476
|
|
$
|
5,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
income margin
|
|
|
16.6
|
%
|
|
15.6
|
%
|
|
35.6
|
%
|
|
3.0
|
%
|
|
49.4
|
%
|
|
20.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliations
to IBM as Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Total
reportable segments
|
|
$
|
25,461
|
|
$
|
26,570
|
|
|
|
Eliminations
of internal transactions
|
|
|
(1,863)
|
|
|
(1,976)
|
|
|
|
Other
revenue adjustments
|
|
|
122
|
|
|
154
|
|
|
|
|
Total
IBM Consolidated
|
|
$
|
23,720
|
|
$
|
24,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
income:
|
|
|
|
|
|
|
|
|
|
Total
reportable segments
|
|
$
|
5,579
|
|
$
|
5,389
|
|
|
|
Amortization
of acquired intangible assets
|
|
|
(201)
|
|
|
(178)
|
|
|
|
Acquisition-related
charges
|
|
|
(13)
|
|
|
(10)
|
|
|
|
Non-operating
retirement-related (costs)/income
|
|
|
(257)
|
|
|
(258)
|
|
|
|
Eliminations
of internal transactions
|
|
|
(280)
|
|
|
(322)
|
|
|
|
Unallocated
corporate amounts
|
|
|
(15)
|
|
|
453
|
*
|
|
|
|
Total
IBM Consolidated
|
$
|
4,812
|
|
$
|
5,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Includes Retail Store Solutions divestiture
gain of $447 million.
Notes to Consolidated Financial
Statements – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEGMENT INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
Business
|
|
|
|
|
Systems and
|
|
Global
|
|
Total
|
|
|
(Dollars in millions)
|
|
Services
|
|
Services
|
|
Software
|
|
Technology
|
|
Financing
|
|
Segments
|
|
|
For the nine months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenue
|
|
$
|
28,634
|
|
$
|
13,649
|
|
$
|
17,792
|
|
$
|
10,111
|
|
$
|
1,488
|
|
$
|
71,674
|
|
|
Internal
revenue
|
|
|
801
|
|
|
545
|
|
|
2,312
|
|
|
423
|
|
|
1,628
|
|
|
5,710
|
|
|
Total
revenue
|
|
$
|
29,435
|
|
$
|
14,194
|
|
$
|
20,105
|
|
$
|
10,533
|
|
$
|
3,116
|
|
$
|
77,383
|
|
|
Pre-tax
income
|
|
$
|
4,994
|
|
$
|
2,274
|
|
$
|
6,867
|
|
$
|
(713)
|
|
$
|
1,582
|
|
$
|
15,003
|
|
|
Revenue
year-to-year change
|
|
|
(4.5)
|
%
|
|
(1.3)
|
%
|
|
0.6
|
%
|
|
(15.0)
|
%
|
|
4.9
|
%
|
|
(3.9)
|
%
|
|
Pre-tax
income year-to-year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
change
|
|
|
1.2
|
%
|
|
6.1
|
%
|
|
1.1
|
%
|
|
nm
|
|
|
4.4
|
%
|
|
(4.1)
|
%
|
|
Pre-tax
income margin
|
|
|
17.0
|
%
|
|
16.0
|
%
|
|
34.2
|
%
|
|
(6.8)
|
%
|
|
50.8
|
%
|
|
19.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm - not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenue
|
|
$
|
29,952
|
|
$
|
13,846
|
|
$
|
17,533
|
|
$
|
11,903
|
|
$
|
1,478
|
|
$
|
74,713
|
|
|
Internal
revenue
|
|
|
869
|
|
|
538
|
|
|
2,459
|
|
|
491
|
|
|
1,492
|
|
|
5,848
|
|
|
Total
revenue
|
|
$
|
30,821
|
|
$
|
14,384
|
|
$
|
19,992
|
|
$
|
12,394
|
|
$
|
2,970
|
|
$
|
80,561
|
|
|
Pre-tax
income
|
|
$
|
4,934
|
|
$
|
2,142
|
|
$
|
6,793
|
|
$
|
253
|
|
$
|
1,516
|
|
$
|
15,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
income margin
|
|
|
16.0
|
%
|
|
14.9
|
%
|
|
34.0
|
%
|
|
2.0
|
%
|
|
51.0
|
%
|
|
19.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliations
to IBM as Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Total
reportable segments
|
|
$
|
77,383
|
|
$
|
80,561
|
|
|
|
Eliminations
of internal transactions
|
|
|
(5,710)
|
|
|
(5,848)
|
|
|
|
Other
revenue adjustments
|
|
|
378
|
|
|
490
|
|
|
|
|
Total
IBM Consolidated
|
|
$
|
72,052
|
|
$
|
75,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
income:
|
|
|
|
|
|
|
|
|
|
Total
reportable segments
|
|
$
|
15,003
|
|
$
|
15,637
|
|
|
|
Amortization
of acquired intangible assets
|
|
|
(562)
|
|
|
(517)
|
|
|
|
Acquisition-related
charges
|
|
|
(29)
|
|
|
(24)
|
|
|
|
Non-operating
retirement-related (costs)/income
|
|
|
(803)
|
|
|
(454)
|
|
|
|
Eliminations
of internal transactions
|
|
|
(998)
|
|
|
(949)
|
|
|
|
Unallocated
corporate amounts
|
|
|
(49)
|
|
|
379
|
*
|
|
|
|
Total
IBM Consolidated
|
$
|
12,562
|
|
$
|
14,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Includes Retail Store Solutions divestiture
gain of $447 million.
Notes to Consolidated Financial
Statements – (continued)
7. Equity Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications
and Taxes Related to Items of Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Before Tax
|
|
|
Tax (Expense)/
|
|
|
Net of Tax
|
|
For the three months ended September 30, 2013:
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Other
comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
382
|
|
$
|
86
|
|
$
|
468
|
|
|
Net
changes related to available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains/(losses) arising during the period
|
|
$
|
3
|
|
$
|
(1)
|
|
$
|
1
|
|
|
|
Reclassification
of (gains)/losses to other (income) and expense
|
|
|
(5)
|
|
|
2
|
|
|
(3)
|
|
|
|
Subsequent
changes in previously impaired securities arising during
|
|
|
|
|
|
|
|
|
|
|
|
|
the period
|
|
|
1
|
|
|
(0)
|
|
|
1
|
|
|
Total
net changes related to available-for-sale securities
|
|
$
|
(1)
|
|
$
|
0
|
|
$
|
(1)
|
|
|
Unrealized
gains/(losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains/(losses) arising during the period
|
|
$
|
(409)
|
|
$
|
144
|
|
$
|
(265)
|
|
|
|
Reclassification
of (gains)/losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
17
|
|
|
(7)
|
|
|
10
|
|
|
|
SG&A expense
|
|
|
(13)
|
|
|
5
|
|
|
(9)
|
|
|
|
Other (income) and expense
|
|
|
(30)
|
|
|
12
|
|
|
(19)
|
|
|
|
Interest expense
|
|
|
(0)
|
|
|
0
|
|
|
(0)
|
|
|
Total
unrealized gains/(losses) on cash flow hedges
|
|
$
|
(436)
|
|
$
|
153
|
|
$
|
(282)
|
|
|
Retirement-related
benefit plans(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service costs/(credits)
|
|
$
|
(0)
|
|
$
|
(0)
|
|
$
|
(0)
|
|
|
|
Net
(losses)/gains arising during the period
|
|
|
105
|
|
|
(36)
|
|
|
68
|
|
|
|
Curtailments
and settlements
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
Amortization
of prior service (credits)/costs
|
|
|
(28)
|
|
|
10
|
|
|
(18)
|
|
|
|
Amortization
of net (gains)/losses
|
|
|
872
|
|
|
(304)
|
|
|
568
|
|
|
Total
retirement-related benefit plans
|
|
$
|
949
|
|
$
|
(331)
|
|
$
|
618
|
|
Other
comprehensive income/(loss)
|
|
$
|
895
|
|
$
|
(91)
|
|
$
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) These AOCI components are included in the computation
of net periodic pension cost. (See note 8, "Retirement-Related
Benefits," on
|
|
pages 32 to 34 for
additional information.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial
Statements – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications
and Taxes Related to Items of Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Before Tax
|
|
|
Tax (Expense)/
|
|
|
Net of Tax
|
|
For the three months ended September 30, 2012:
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Other
comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
501
|
|
$
|
56
|
|
$
|
557
|
|
|
Net
changes related to available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains/(losses) arising during the period
|
|
$
|
11
|
|
$
|
(4)
|
|
$
|
6
|
|
|
|
Reclassification
of (gains)/losses to other (income) and expense
|
|
|
(27)
|
|
|
11
|
|
|
(17)
|
|
|
|
Subsequent
changes in previously impaired securities arising during
|
|
|
|
|
|
|
|
|
|
|
|
|
the period
|
|
|
(7)
|
|
|
3
|
|
|
(4)
|
|
|
Total
net changes related to available-for-sale securities
|
|
$
|
(24)
|
|
$
|
9
|
|
$
|
(15)
|
|
|
Unrealized
gains/(losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains/(losses) arising during the period
|
|
$
|
(54)
|
|
$
|
10
|
|
$
|
(43)
|
|
|
|
Reclassification
of (gains)/losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
(6)
|
|
|
(1)
|
|
|
(7)
|
|
|
|
SG&A expense
|
|
|
(5)
|
|
|
1
|
|
|
(4)
|
|
|
|
Other (income) and expense
|
|
|
(103)
|
|
|
40
|
|
|
(63)
|
|
|
|
Interest expense
|
|
|
2
|
|
|
(1)
|
|
|
1
|
|
|
Total
unrealized gains/(losses) on cash flow hedges
|
|
$
|
(165)
|
|
$
|
50
|
|
$
|
(116)
|
|
|
Retirement-related
benefit plans(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service costs/(credits)
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
|
|
Net
(losses)/gains arising during the period
|
|
|
1
|
|
|
(1)
|
|
|
0
|
|
|
|
Curtailments
and settlements
|
|
|
(2)
|
|
|
1
|
|
|
(1)
|
|
|
|
Amortization
of prior service (credits)/costs
|
|
|
(37)
|
|
|
15
|
|
|
(23)
|
|
|
|
Amortization
of net (gains)/losses
|
|
|
613
|
|
|
(238)
|
|
|
375
|
|
|
Total
retirement-related benefit plans
|
|
$
|
575
|
|
$
|
(224)
|
|
$
|
351
|
|
Other
comprehensive income/(loss)
|
|
$
|
887
|
|
$
|
(109)
|
|
$
|
778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) These AOCI components are included in the computation
of net periodic pension cost. (See note 8, "Retirement-Related
Benefits," on
|
|
pages 32 to 34 for additional information.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial
Statements – (continued)
|
Reclassifications and Taxes Related to Items of Other
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Before Tax
|
|
|
Tax (Expense)/
|
|
|
Net of Tax
|
|
For the nine months ended September 30, 2013:
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Other
comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
(959)
|
|
$
|
(21)
|
|
$
|
(980)
|
|
|
Net
changes related to available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains/(losses) arising during the period
|
|
$
|
0
|
|
$
|
(1)
|
|
$
|
(0)
|
|
|
|
Reclassification
of (gains)/losses to other (income) and expense
|
|
|
(5)
|
|
|
2
|
|
|
(3)
|
|
|
|
Subsequent
changes in previously impaired securities arising during
|
|
|
|
|
|
|
|
|
|
|
|
|
the period
|
|
|
3
|
|
|
(1)
|
|
|
2
|
|
|
Total
net changes related to available-for-sale securities
|
|
$
|
(1)
|
|
$
|
0
|
|
$
|
(1)
|
|
|
Unrealized
gains/(losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains/(losses) arising during the period
|
|
$
|
(58)
|
|
$
|
25
|
|
$
|
(33)
|
|
|
|
Reclassification
of (gains)/losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
15
|
|
|
(6)
|
|
|
9
|
|
|
|
SG&A expense
|
|
|
(29)
|
|
|
10
|
|
|
(18)
|
|
|
|
Other (income) and expense
|
|
|
(115)
|
|
|
45
|
|
|
(71)
|
|
|
|
Interest expense
|
|
|
(0)
|
|
|
0
|
|
|
(0)
|
|
|
Total
unrealized gains/(losses) on cash flow hedges
|
|
$
|
(188)
|
|
$
|
74
|
|
$
|
(114)
|
|
|
Retirement-related
benefit plans(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service costs/(credits)
|
|
$
|
33
|
|
$
|
(11)
|
|
$
|
21
|
|
|
|
Net
(losses)/gains arising during the period
|
|
|
300
|
|
|
(103)
|
|
|
197
|
|
|
|
Curtailments
and settlements
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
Amortization
of prior service (credits)/costs
|
|
|
(86)
|
|
|
30
|
|
|
(57)
|
|
|
|
Amortization
of net (gains)/losses
|
|
|
2,623
|
|
|
(901)
|
|
|
1,721
|
|
|
Total
retirement-related benefit plans
|
|
$
|
2,869
|
|
$
|
(986)
|
|
$
|
1,883
|
|
Other
comprehensive income/(loss)
|
|
$
|
1,721
|
|
$
|
(933)
|
|
$
|
788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) These AOCI components are included in the computation
of net periodic pension cost. (See note 8, "Retirement-Related
Benefits," on
|
|
pages 32 to 34 for
additional information.)
|
Notes to Consolidated Financial
Statements – (continued)
|
Reclassifications and Taxes Related to Items of Other
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Before Tax
|
|
|
Tax (Expense)/
|
|
|
Net of Tax
|
|
For the nine months ended September 30, 2012:
|
|
|
Amount
|
|
|
Benefit
|
|
|
Amount
|
|
Other
comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
164
|
|
$
|
9
|
|
$
|
172
|
|
|
Net
changes related to available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains/(losses) arising during the period
|
|
$
|
13
|
|
$
|
(5)
|
|
$
|
8
|
|
|
|
Reclassification
of (gains)/losses to other (income) and expense
|
|
|
(43)
|
|
|
17
|
|
|
(26)
|
|
|
|
Subsequent
changes in previously impaired securities arising during
|
|
|
|
|
|
|
|
|
|
|
|
|
the period
|
|
|
20
|
|
|
(8)
|
|
|
12
|
|
|
Total
net changes related to available-for-sale securities
|
|
$
|
(10)
|
|
$
|
4
|
|
$
|
(6)
|
|
|
Unrealized
gains/(losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains/(losses) arising during the period
|
|
$
|
65
|
|
$
|
(35)
|
|
$
|
31
|
|
|
|
Reclassification
of (gains)/losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
(22)
|
|
|
(1)
|
|
|
(23)
|
|
|
|
SG&A expense
|
|
|
(21)
|
|
|
5
|
|
|
(16)
|
|
|
|
Other (income) and expense
|
|
|
(209)
|
|
|
81
|
|
|
(128)
|
|
|
|
Interest expense
|
|
|
6
|
|
|
(2)
|
|
|
4
|
|
|
Total
unrealized gains/(losses) on cash flow hedges
|
|
$
|
(181)
|
|
$
|
48
|
|
$
|
(133)
|
|
|
Retirement-related
benefit plans(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service costs/(credits)
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
|
|
Net
(losses)/gains arising during the period
|
|
|
66
|
|
|
(24)
|
|
|
41
|
|
|
|
Curtailments
and settlements
|
|
|
(1)
|
|
|
1
|
|
|
(1)
|
|
|
|
Amortization
of prior service (credits)/costs
|
|
|
(112)
|
|
|
41
|
|
|
(70)
|
|
|
|
Amortization
of net (gains)/losses
|
|
|
1,846
|
|
|
(684)
|
|
|
1,161
|
|
|
Total
retirement-related benefit plans
|
|
$
|
1,799
|
|
$
|
(667)
|
|
$
|
1,132
|
|
Other
comprehensive income/(loss)
|
|
$
|
1,771
|
|
$
|
(606)
|
|
$
|
1,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) These AOCI components are included in the computation
of net periodic pension cost. (See note 8, "Retirement-Related
Benefits," on
|
|
pages 32 to 34 for
additional information.)
|
Notes to Consolidated Financial
Statements – (continued)
|
Accumulated Other Comprehensive Income/(Loss) (net of
tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change
|
|
Net Unrealized
|
|
|
|
|
|
|
|
Net Unrealized
|
|
Foreign
|
|
Retirement-
|
|
Gains/(Losses)
|
|
Accumulated
|
|
|
|
|
Gains/(Losses)
|
|
Currency
|
|
Related
|
|
on Available-
|
|
Other
|
|
|
|
|
on Cash Flow
|
|
Translation
|
|
Benefit
|
|
For-Sale
|
|
Comprehensive
|
|
(Dollars in Millions)
|
|
Hedges
|
|
Adjustments*
|
|
Plans
|
|
Securities
|
|
Income/(Loss)
|
|
January 1, 2013
|
|
$
|
(90)
|
|
$
|
1,733
|
|
$
|
(27,406)
|
|
$
|
4
|
|
$
|
(25,759)
|
|
Other comprehensive income before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassifications
|
|
|
(33)
|
|
|
(980)
|
|
|
218
|
|
|
2
|
|
|
(793)
|
|
Amount reclassified from accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other comprehensive income
|
|
|
(81)
|
|
|
0
|
|
|
1,664
|
|
|
(3)
|
|
|
1,580
|
|
Total change for the period
|
|
|
(114)
|
|
|
(980)
|
|
|
1,883
|
|
|
(1)
|
|
|
788
|
|
September 30, 2013
|
|
$
|
(204)
|
|
$
|
752
|
|
$
|
(25,523)
|
|
$
|
3
|
|
$
|
(24,971)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change
|
|
Net Unrealized
|
|
|
|
|
|
|
|
Net Unrealized
|
|
Foreign
|
|
Retirement-
|
|
Gains/(Losses)
|
|
Accumulated
|
|
|
|
|
Gains/(Losses)
|
|
Currency
|
|
Related
|
|
on Available-
|
|
Other
|
|
|
|
|
on Cash Flow
|
|
Translation
|
|
Benefit
|
|
For-Sale
|
|
Comprehensive
|
|
(Dollars in Millions)
|
|
Hedges
|
|
Adjustments*
|
|
Plans
|
|
Securities
|
|
Income/(Loss)
|
|
January 1, 2012
|
|
$
|
71
|
|
$
|
1,767
|
|
$
|
(23,737)
|
|
$
|
13
|
|
$
|
(21,885)
|
|
Other comprehensive income before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassifications
|
|
|
31
|
|
|
172
|
|
|
41
|
|
|
20
|
|
|
264
|
|
Amount reclassified from accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other comprehensive income
|
|
|
(164)
|
|
|
0
|
|
|
1,090
|
|
|
(26)
|
|
|
900
|
|
Total change for the period
|
|
|
(133)
|
|
|
172
|
|
|
1,132
|
|
|
(6)
|
|
|
1,165
|
|
September 30, 2012
|
|
$
|
(61)
|
|
$
|
1,939
|
|
$
|
(22,606)
|
|
$
|
7
|
|
$
|
(20,720)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Foreign currency translation adjustments are presented
gross except for any associated hedges which are presented net of tax.
|
8. Retirement-Related Benefits: The company offers defined benefit pension plans, defined
contribution pension plans, as well as nonpension postretirement plans
primarily consisting of retiree medical benefits. The following table provides
the total retirement-related benefit plans’ impact on income before income
taxes:
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Retirement-related
plans – cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit and contribution pension plans – cost
|
|
$
|
631
|
|
$
|
612
|
|
|
3.1
|
%
|
|
|
Nonpension
postretirement plans – cost
|
|
|
74
|
|
|
86
|
|
|
(14.0)
|
|
|
|
Total
|
|
$
|
705
|
|
$
|
698
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Retirement-related
plans – cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit and contribution pension plans – cost
|
|
$
|
1,941
|
|
$
|
1,602
|
|
|
21.1
|
%
|
|
|
Nonpension
postretirement plans – cost
|
|
|
224
|
|
|
260
|
|
|
(13.6)
|
|
|
|
Total
|
|
$
|
2,165
|
|
$
|
1,862
|
|
|
16.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial
Statements – (continued)
The following tables provide the components of the
cost/(income) for the company’s pension plans:
|
Cost/(Income)
of Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
Service
cost
|
|
$
|
—
|
|
$
|
—
|
|
$
|
124
|
|
$
|
109
|
|
|
Interest
cost
|
|
|
495
|
|
|
549
|
|
|
379
|
|
|
439
|
|
|
Expected
return on plan assets
|
|
|
(995)
|
|
|
(1,011)
|
|
|
(546)
|
|
|
(570)
|
|
|
Amortization
of prior service costs/(credits)
|
|
|
2
|
|
|
2
|
|
|
(29)
|
|
|
(39)
|
|
|
Recognized
actuarial losses
|
|
|
448
|
|
|
333
|
|
|
397
|
|
|
255
|
|
|
Curtailments
and settlements
|
|
|
—
|
|
|
—
|
|
|
0
|
|
|
0
|
|
|
Multi-employer
plans/other costs
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
188
|
*
|
|
Total
net periodic pension (income)/cost of defined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
plans
|
|
|
(50)
|
|
|
(127)
|
|
|
341
|
|
|
381
|
|
|
Cost
of defined contribution plans
|
|
|
204
|
|
|
209
|
|
|
137
|
|
|
148
|
|
|
Total
defined benefit and contribution plans cost recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
the Consolidated Statement of Earnings
|
|
$
|
154
|
|
$
|
82
|
|
$
|
478
|
|
$
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Includes a $162 million charge related to litigation involving one of
IBM UK’s defined benefit plans.
|
(Dollars in millions)
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
Service
cost
|
|
$
|
—
|
|
$
|
—
|
|
$
|
375
|
|
$
|
332
|
|
|
Interest
cost
|
|
|
1,485
|
|
|
1,647
|
|
|
1,137
|
|
|
1,332
|
|
|
Expected
return on plan assets
|
|
|
(2,986)
|
|
|
(3,033)
|
|
|
(1,636)
|
|
|
(1,723)
|
|
|
Amortization
of prior service costs/(credits)
|
|
|
7
|
|
|
7
|
|
|
(90)
|
|
|
(116)
|
|
|
Recognized
actuarial losses
|
|
|
1,343
|
|
|
998
|
|
|
1,195
|
|
|
770
|
|
|
Curtailments
and settlements
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Multi-employer
plan/other costs
|
|
|
—
|
|
|
—
|
|
|
71
|
|
|
234
|
*
|
|
Total
net periodic pension (income)/cost of defined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
plans
|
|
|
(151)
|
|
|
(381)
|
|
|
1,052
|
|
|
831
|
|
|
Cost
of defined contribution plans
|
|
|
603
|
|
|
686
|
|
|
437
|
|
|
467
|
|
|
Total
defined benefit and contribution plans cost recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
the Consolidated Statement of Earnings
|
|
$
|
452
|
|
$
|
305
|
|
$
|
1,489
|
|
$
|
1,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Includes a $162
million charge related to litigation involving one of IBM UK’s defined benefit
plans.
In 2013, the company expects to contribute to its
non-U.S. defined benefit and multi-employer plans approximately $500 million, which will be
mainly contributed to the defined benefit pension plans in Japan, the UK and
Switzerland. This amount represents the legally mandated minimum contribution.
Total net contributions to the non-U.S. plans in the first nine months of 2013
were $397 million.
Notes to Consolidated Financial
Statements – (continued)
|
The following table
provides the components of the cost/(income) for the company's nonpension
postretirement plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Nonpension Postretirement Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plan
|
|
Non-U.S. Plans
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
For the three months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
9
|
|
$
|
9
|
|
$
|
2
|
|
$
|
2
|
|
Interest
cost
|
|
|
41
|
|
|
50
|
|
|
14
|
|
|
16
|
|
Expected
return on plan assets
|
|
|
0
|
|
|
—
|
|
|
(2)
|
|
|
(2)
|
|
Amortization
of prior service costs/(credits)
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
(1)
|
|
Recognized
actuarial losses
|
|
|
5
|
|
|
8
|
|
|
6
|
|
|
4
|
|
Total
nonpension postretirement plan cost recognized in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Earnings
|
|
$
|
55
|
|
$
|
67
|
|
$
|
19
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
U.S. Plan
|
|
Non-U.S. Plans
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Service
cost
|
|
$
|
26
|
|
$
|
28
|
|
$
|
7
|
|
$
|
7
|
|
Interest
cost
|
|
|
123
|
|
|
150
|
|
|
46
|
|
|
48
|
|
Expected
return on plan assets
|
|
|
(1)
|
|
|
—
|
|
|
(7)
|
|
|
(7)
|
|
Amortization
of prior service credits
|
|
|
—
|
|
|
—
|
|
|
(4)
|
|
|
(3)
|
|
Recognized
actuarial losses
|
|
|
16
|
|
|
24
|
|
|
18
|
|
|
13
|
|
Curtailments
and settlements
|
|
|
—
|
|
|
—
|
|
|
0
|
|
|
—
|
|
Total
nonpension postretirement plan cost recognized in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Earnings
|
|
$
|
164
|
|
$
|
201
|
|
$
|
60
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
company received a $8.2 million
subsidy in the third quarter of 2013 and a $24.4 million subsidy for the
first nine months of 2013 in connection with the Medicare Prescription Drug
Improvement and Modernization Act of 2003. A portion of this subsidy is used by
the company to reduce its obligation and expense related to the plan, and the
remainder is contributed to the plan to reduce contributions required by the
participants.
9. Acquisitions/Divestitures:
Acquisitions: During
the nine months ended September 30, 2013, the company completed seven
acquisitions at an aggregate cost of $2,734 million.
SoftLayer Technologies, Inc. (SoftLayer) – On July 3, 2013, the company completed the acquisition of
100 percent of the privately held company, SoftLayer, a cloud computing
infrastructure provider based in Dallas, Texas for cash consideration of $1,977
million. SoftLayer joins the company’s new cloud services division, which
combines SoftLayer with IBM SmartCloud into a global platform. The new division
will provide a broad range of choices to both the company’s and SoftLayer
clients, ISVs and channel and technology partners. Goodwill of $1,284 million
has been assigned to the Global Technology Services ($1,245 million) and
Software ($39 million) segments. It is expected that none of the goodwill will
be deductible for tax purposes. The overall weighted average useful life of the
identified intangible assets acquired is 7.0 years.
Other Acquisitions - The Software segment completed acquisitions of five
privately held companies: in the first quarter, StoredIQ Inc. (StoredIQ) and
Star Analytics, Inc. (Star Analytics); in the second quarter, UrbanCode Inc.
(UrbanCode); and in the third quarter, Trusteer, Ltd. (Trusteer) and Daeja
Image Systems, Ltd. (Daeja). Systems and Technology (STG) completed one
acquisition: in the third quarter, CSL International (CSL), a privately held
company. All acquisitions were for 100 percent of the acquired companies.
The table on page 35 reflects the purchase
price related to these acquisitions and the resulting purchase price
allocations as of September 30, 2013:
Notes to Consolidated Financial
Statements – (continued)
|
|
|
|
|
Amortization
|
|
|
|
|
|
Other
|
|
|
|
(Dollars in millions)
|
|
Life (in yrs.)
|
|
|
SoftLayer
|
|
|
Acquisitions
|
|
|
|
Current
assets
|
|
|
|
|
$
|
80
|
|
$
|
70
|
|
|
|
Fixed
assets/noncurrent assets
|
|
|
|
|
|
301
|
|
|
18
|
|
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
N/A
|
|
|
1,284
|
|
|
551
|
|
|
|
|
Completed
technology
|
|
|
5-7
|
|
|
290
|
|
|
126
|
|
|
|
|
Client
relationships
|
|
|
7
|
|
|
245
|
|
|
59
|
|
|
|
|
In-Process
R&D
|
|
|
N/A
|
|
|
2
|
|
|
—
|
|
|
|
|
Patents/trademarks
|
|
|
2-7
|
|
|
75
|
|
|
22
|
|
|
|
Total
assets acquired
|
|
|
|
|
|
2,277
|
|
|
846
|
|
|
|
Current
liabilities
|
|
|
|
|
|
(56)
|
|
|
(20)
|
|
|
|
Noncurrent
liabilities
|
|
|
|
|
|
(244)
|
|
|
(69)
|
|
|
|
Total
liabilities assumed
|
|
|
|
|
|
(300)
|
|
|
(89)
|
|
|
|
Total
purchase price
|
|
|
|
|
$
|
1,977
|
|
$
|
757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A - not applicable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to SoftLayer, each acquisition further
complemented and enhanced the company’s portfolio of product and services
offerings. The acquisition of StoredIQ advances the company’s efforts to help
clients derive value from big data. The combination of the company’s and Star
Analytics’ software will advance the company’s business analytics initiatives.
UrbanCode automates the delivery of software, helping businesses quickly
release and update mobile, social, big data and cloud applications. CSL deepens
the consolidation cloud capabilities by offering simplified management of the
virtualization environment. Trusteer extends the company’s data security
capabilities further into the cloud, mobile and endpoint security space. Daeja
delivers software that helps employees across all industries, especially data
intensive ones such as banking, insurance and healthcare, get faster access to
critical business information, and complements the company’s big data
capabilities.
Purchase price consideration for these acquisitions as
reflected in the table above, is paid primarily in cash. All acquisitions are
reported in the Consolidated Statement of Cash Flows net of acquired cash and
cash equivalents.
The
acquisitions were accounted for as business combinations using the acquisition
method, and accordingly, the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquired entity was recorded at
their estimated fair values at the date of acquisition. The primary items that
generated the goodwill are the value of the synergies between the acquired
companies and IBM and the acquired assembled work-force, neither of which
qualify as an amortizable intangible asset. For the “Other Acquisitions”, the
overall weighted-average life of the identified amortizable intangible assets
acquired is 6.5 years. These identified intangible assets will be amortized on
a straight-line basis over their useful lives. Goodwill of $538 million has
been assigned to the Software segment and goodwill of $13 million has been
assigned to the Systems and Technology Group segment. It is expected that
approximately 3 percent of the goodwill will be deductible for tax purposes.
On October 25,
2013, the company completed the acquisition of The Now Factory, a privately
held company based in Dublin, Ireland. The Now Factory is a provider of
analytics software that helps communications service providers (CSPs) deliver
better customer experiences and drive new revenue opportunities. At the date of
issuance of the financial statements, the initial business combination
accounting was not complete for this acquisition.
On October
2, 2013, the company completed the acquisition of Xtify, Inc., a leading
provider of cloud-based mobile messaging tools that help organizations improve
mobile sales, drive in-store traffic, and engage customers with personalized
offers. At the date of issuance of the financial statements, the initial business
combination accounting was not complete for this acquisition.
Divestitures:
On September 10, 2013, IBM and SYNNEX announced a
definitive agreement in which SYNNEX will acquire the company’s worldwide
customer care business process outsourcing services business for $505 million,
consisting of approximately $430 million in cash, net of balance sheet
adjustments, and $75 million in SYNNEX stock, which represents less than 5
percent equity ownership in SYNNEX. As part of the transaction, SYNNEX will
enter into a multi-year
Notes to Consolidated Financial
Statements – (continued)
agreement with the company,
and Concentrix, SYNNEX’s outsourcing business, will become an IBM strategic
business partner for global customer care business process outsourcing
services.
The transaction will be completed as soon as is practical, subject
to the satisfaction of regulatory requirements and customary closing conditions.
The transaction is expected to be completed in phases, with the initial closing
expected within several months, and subsequent closings by the end of 2014,
subject to similar conditions, local agreements and the information and
consultation process in applicable countries. The company expects to recognize
a total pre-tax gain on the sale of between $125 million and $175 million. This
gain will be recognized consistent with the closing schedule for the
transaction. See page 71 for additional information regarding the impact of the
gain on the company’s earnings expectations. The company’s worldwide customer
care business process outsourcing services and industry process services are
included in the Global Technology Services segment. In 2012, the divested
business delivered $1.3 billion of revenue, approximately 1 percent of the
company’s total revenue, and $0.1 billion of pre-tax income.
In the first quarter of
2013, the company completed the divestiture of its Showcase Reporting product
set to Help/Systems. Showcase Reporting, which was acquired by the company
through the SPSS acquisition in 2009, is an enterprise-class business intelligence
platform that enables customers to build and manage analytical reporting environments.
This transaction was not material to the Consolidated Financial Statements.
10. Intangible Assets Including Goodwill: The following table details the company’s intangible
asset balances by major asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2013
|
|
(Dollars in millions)
|
|
Gross Carrying
|
|
Accumulated
|
|
Net Carrying
|
|
Intangible asset class
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Capitalized
software
|
|
$
|
1,518
|
|
$
|
(688)
|
|
$
|
829
|
|
Client
relationships
|
|
|
2,348
|
|
|
(1,137)
|
|
|
1,211
|
|
Completed
technology
|
|
|
2,886
|
|
|
(1,153)
|
|
|
1,734
|
|
In-process
R&D
|
|
|
17
|
|
|
—
|
|
|
17
|
|
Patents/trademarks
|
|
|
365
|
|
|
(156)
|
|
|
209
|
|
Other(a)
|
|
|
7
|
|
|
(5)
|
|
|
2
|
|
Total
|
|
$
|
7,141
|
|
$
|
(3,139)
|
|
$
|
4,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
(Dollars in millions)
|
|
Gross Carrying
|
|
Accumulated
|
|
Net Carrying
|
|
Intangible asset class
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Capitalized
software
|
|
$
|
1,527
|
|
$
|
(665)
|
|
$
|
861
|
|
Client
relationships
|
|
|
2,103
|
|
|
(961)
|
|
|
1,142
|
|
Completed
technology
|
|
|
2,709
|
|
|
(1,112)
|
|
|
1,597
|
|
In-process
R&D
|
|
|
28
|
|
|
—
|
|
|
28
|
|
Patents/trademarks
|
|
|
281
|
|
|
(127)
|
|
|
154
|
|
Other(a)
|
|
|
31
|
|
|
(27)
|
|
|
3
|
|
Total
|
|
$
|
6,679
|
|
$
|
(2,892)
|
|
$
|
3,787
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Other intangibles are primarily
acquired proprietary and non-proprietary business processes, methodologies and
systems.
The net carrying amount of
intangible assets increased $216 million during the first
nine months of 2013, primarily due to intangible asset additions resulting from
acquisitions, partially offset by amortization. The aggregate intangible
amortization expense was $350
million and $1,007 million for the third quarter and first nine months of 2013,
respectively, versus $324
million and $952 million
for the third quarter and first nine months of 2012, respectively. In addition,
in the first nine months of 2013, the company retired $758 million of fully amortized
intangible assets, impacting both the gross carrying amount and accumulated
amortization by this amount.
The amortization expense for
each of the five succeeding years relating to intangible assets currently
recorded in the Consolidated Statement of Financial Position is estimated to be
the following at September 30, 2013:
Notes to Consolidated Financial
Statements – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
|
|
Acquired
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Software
|
|
Intangibles
|
|
Total
|
|
|
|
2013
(for Q4)
|
|
$
|
146
|
|
$
|
187
|
|
$
|
333
|
|
|
|
2014
|
|
|
441
|
|
|
767
|
|
|
1,207
|
|
|
|
2015
|
|
|
204
|
|
|
621
|
|
|
824
|
|
|
|
2016
|
|
|
39
|
|
|
579
|
|
|
618
|
|
|
|
2017
|
|
|
—
|
|
|
461
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the goodwill balances by reportable
segment, for the nine months ended September 30, 2013 and for the year ended December
31, 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
|
Translation
|
|
|
|
|
(Dollars in millions)
|
|
Balance
|
|
Goodwill
|
|
Price
|
|
|
|
And Other
|
|
Balance
|
|
Segment
|
|
01/01/13
|
|
Additions
|
|
Adjustments
|
|
Divestitures
|
Adjustments
|
|
9/30/13
|
|
Global
Business Services
|
|
$
|
4,357
|
|
$
|
—
|
|
$
|
(0)
|
|
$
|
—
|
|
$
|
(26)
|
|
$
|
4,331
|
|
Global
Technology Services
|
|
|
2,916
|
|
|
1,245
|
|
|
5
|
|
|
—
|
|
|
(41)
|
|
|
4,126
|
|
Software
|
|
|
20,405
|
|
|
577
|
|
|
(25)
|
|
|
(2)
|
|
|
(137)
|
|
|
20,818
|
|
Systems
and Technology
|
|
|
1,568
|
|
|
13
|
|
|
33
|
|
|
—
|
|
|
(7)
|
|
|
1,607
|
|
Total
|
|
$
|
29,247
|
|
$
|
1,834
|
|
$
|
13
|
|
$
|
(2)
|
|
$
|
(211)
|
|
$
|
30,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
|
|
Translation
|
|
|
|
|
(Dollars in millions)
|
|
Balance
|
|
Goodwill
|
|
Price
|
|
|
|
|
And Other
|
|
Balance
|
|
Segment
|
|
01/01/12
|
|
Additions
|
|
Adjustments
|
|
Divestitures
|
|
Adjustments
|
|
12/31/12
|
|
Global
Business Services
|
|
$
|
4,313
|
|
$
|
5
|
|
$
|
(0)
|
|
$
|
(2)
|
|
$
|
42
|
|
$
|
4,357
|
|
Global
Technology Services
|
|
|
2,646
|
|
|
264
|
|
|
—
|
|
|
(0)
|
|
|
6
|
|
|
2,916
|
|
Software
|
|
|
18,121
|
|
|
2,182
|
|
|
(30)
|
|
|
(6)
|
|
|
137
|
|
|
20,405
|
|
Systems
and Technology
|
|
|
1,133
|
|
|
443
|
|
|
(0)
|
|
|
(14)
|
|
|
6
|
|
|
1,568
|
|
Total
|
|
$
|
26,213
|
|
$
|
2,894
|
|
$
|
(30)
|
|
$
|
(22)
|
|
$
|
192
|
|
$
|
29,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
price adjustments recorded in the first nine months of 2013 and full year 2012
were related to acquisitions that were completed on or prior to December 31,
2012 or December 31, 2011, respectively, and were still subject to the
measurement period that ends at the earlier of 12 months from the acquisition
date or when information becomes available. There were no goodwill impairment
losses recorded during the first nine months of 2013 or the full year of 2012
and the company has no accumulated impairment losses.
11. Restructuring-Related Liabilities: The following table provides a roll forward of the current
and noncurrent liability balances for special actions taken in the following
periods: (1) the second quarter of 2005 associated with Global Services,
primarily in Europe, (2) the fourth quarter of 2002 associated with the
acquisition of the PricewaterhouseCoopers consulting business, (3) the second
quarter of 2002 associated with the Microelectronics Division and the
rebalancing of the company’s workforce and leased space resources, (4) the 2002
actions associated with the hard disk drive business for reductions in
workforce, manufacturing capacity and space, (5) the actions taken in 1999, and
(6) the actions that were executed prior to 1994.
Notes to Consolidated Financial
Statements – (continued)
|
|
|
|
Liability
|
|
|
|
|
|
|
|
Liability
|
|
|
|
|
as of
|
|
|
|
|
Other
|
|
as of
|
|
(Dollars in millions)
|
|
01/01/13
|
|
Payments
|
|
Adjustments*
|
|
9/30/2013
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
|
|
$
|
28
|
|
$
|
(22)
|
|
$
|
25
|
|
$
|
31
|
|
|
Space
|
|
|
2
|
|
|
(1)
|
|
|
(1)
|
|
|
0
|
|
Total
current
|
|
$
|
30
|
|
$
|
(23)
|
|
$
|
24
|
|
$
|
31
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
|
|
$
|
430
|
|
$
|
—
|
|
$
|
1
|
|
$
|
430
|
|
|
Space
|
|
|
0
|
|
|
—
|
|
|
0
|
|
|
0
|
|
Total
noncurrent
|
|
$
|
430
|
|
$
|
—
|
|
$
|
1
|
|
$
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Principally includes the reclassification of
noncurrent to current, foreign currency translation adjustments and interest
accretion.
|
12. Contingencies: As a company with a
substantial employee population and with clients in more than 170 countries,
IBM is involved, either as plaintiff or defendant, in a variety of ongoing
claims, demands, suits, investigations, tax matters and proceedings that arise
from time to time in the ordinary course of its business. The company is a
leader in the information technology industry and, as such, has been and will
continue to be subject to claims challenging its IP rights and associated
products and offerings, including claims of copyright and patent infringement
and violations of trade secrets and other IP rights. In addition, the company
enforces its own IP against infringement, through license negotiations,
lawsuits or otherwise. Also, as is typical for companies of IBM’s scope and scale,
the company is party to actions and proceedings in various jurisdictions
involving a wide range of labor and employment issues (including matters
related to contested employment decisions, country-specific labor and
employment laws, and the company’s pension, retirement and other benefit
plans), as well as actions with respect to contracts, product liability,
securities, foreign operations, competition law and environmental matters.
These actions may be commenced by a number of different parties, including
competitors, clients, current or former employees, government and regulatory
agencies, stockholders and representatives of the locations in which the
company does business. Some of the actions to which the company is party may
involve particularly complex technical issues, and some actions may raise novel
questions under the laws of the various jurisdictions in which these matters
arise.
The company records a provision with respect to a
claim, suit, investigation or proceeding when it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated. Any
recorded liabilities, including any changes to such liabilities for the third quarter
and first nine months of 2013 were not material to the Consolidated Financial
Statements.
In accordance with the relevant accounting guidance,
the company provides disclosures of matters for which the likelihood of
material loss is at least reasonably possible. In addition, the company also
discloses matters based on its consideration of other matters and qualitative
factors, including the experience of other companies in the industry, and
investor, customer and employee relations considerations.
With respect to certain of the claims, suits,
investigations and proceedings discussed herein, the company believes at this
time that the likelihood of any material loss is remote, given, for example,
the procedural status, court rulings, and/or the strength of the company’s
defenses in those matters. With respect to the remaining claims, suits,
investigations and proceedings discussed in this Note, the company is unable to
provide estimates of reasonably possible losses or range of losses, including
losses in excess of amounts accrued, if any, for the following reasons. Claims,
suits, investigations and proceedings are inherently uncertain, and it is not
possible to predict the ultimate outcome of these matters. It is the company’s
experience that damage amounts claimed in litigation against it are unreliable
and unrelated to possible outcomes, and as such are not meaningful indicators
of the company’s potential liability. Further, the company is unable to provide
such an estimate due to a number of other factors with respect to these claims,
suits, investigations and proceedings, including considerations of the procedural
status of the matter in question, the presence of complex or novel legal
theories, and/or the ongoing discovery and development of information important
to the matters. The company reviews claims, suits, investigations and
proceedings at least quarterly, and decisions are made with respect to
recording or adjusting provisions and disclosing reasonably possible losses or
range of losses (individually or in the aggregate), to reflect the impact and
status of settlement discussions, discovery, procedural and substantive
rulings, reviews by counsel and other information pertinent to a particular matter.
Whether any losses, damages or remedies finally
determined in any claim, suit, investigation or proceeding could reasonably
have a material effect on the company’s business, financial condition, results
of operations or cash flows will depend on a number of variables, including:
the timing and amount of such losses or damages; the structure and type of any
such remedies; the significance of the impact any such losses, damages or
remedies may have in the Consolidated Financial
Notes to Consolidated Financial
Statements – (continued)
Statements;
and the unique facts and circumstances of the particular matter that may give
rise to additional factors. While the company will continue to defend itself
vigorously, it is possible that the company’s business, financial condition,
results of operations or cash flows could be affected in any particular period
by the resolution of one or more of these matters.
The following is a summary of the more significant
legal matters involving the company.
The company is a defendant in an action filed on
March 6, 2003 in state court in Salt Lake City, Utah by the SCO Group (SCO v.
IBM). The company removed the case to Federal Court in Utah. Plaintiff is an
alleged successor in interest to some of AT&T’s UNIX IP rights, and alleges
copyright infringement, unfair competition, interference with contract and
breach of contract with regard to the company’s distribution of AIX and Dynix
and contribution of code to Linux. The company has asserted counterclaims,
including breach of contract, violation of the Lanham Act, unfair competition,
intentional torts, unfair and deceptive trade practices, breach of the General
Public License that governs open source distributions, promissory estoppel and
copyright infringement. Motions for summary judgment were heard in March 2007,
and the court has not yet issued its decision. On September 14, 2007, plaintiff
filed for bankruptcy protection, and all proceedings in this case were stayed.
On August 25, 2009, the U.S. Bankruptcy Court for the District of Delaware
approved the appointment of a Trustee of SCO. The court in another suit, the
SCO Group, Inc. v. Novell, Inc., held a trial in March 2010. The jury found
that Novell is the owner of UNIX and UnixWare copyrights; the judge
subsequently ruled that SCO is obligated to recognize Novell’s waiver of SCO’s
claims against IBM and Sequent for breach of UNIX license agreements. On August
30, 2011, the Tenth Circuit Court of Appeals affirmed the district court’s
ruling and denied SCO’s appeal of this matter. In June 2013, the Federal Court in Utah granted SCO’s motion to reopen the SCO v. IBM
case. On July 10, 2013, the Court entered an order
dismissing seven of SCO's ten claims, specifically its breach of contract and
copyright claims, and one tortious interference claim.
On May 13, 2010, IBM and the State of Indiana (acting on behalf of the Indiana Family and Social Services Administration) sued
one another in a dispute over a 2006 contract regarding the modernization of
social service program processing in Indiana. The State terminated the
contract, claiming that IBM was in breach, and the State is seeking damages.
IBM believes the State’s claims against it are without merit and is seeking
payment of termination amounts specified in the contract. Trial began in late
February 2012 in Marion County, Indiana Superior Court and concluded in early
April. On July 18, 2012, the court rejected the State’s claims in their
entirety and awarded IBM $52 million plus interest and costs. The parties have
each appealed portions of the court’s ruling.
IBM United Kingdom Limited (IBM UK) initiated legal proceedings in May 2010 before the High Court in London against the IBM UK
Pensions Trust (the UK Trust) and two representative beneficiaries of the UK
Trust membership. IBM UK is seeking a declaration that it acted lawfully both
in notifying the Trustee of the UK Trust that it was closing its UK defined
benefit plans to future accruals for most participants and in implementing the
company’s new retirement policy. The trial in the High Court concluded in April
2013 and the company is awaiting a ruling from the Court. In addition, IBM UK is a defendant in approximately 290 individual actions brought since early 2010 by participants
of the defined benefits plans who left IBM UK. These actions, which allege
constructive dismissal and age discrimination, are pending before the
Employment Tribunal in Southampton UK and are currently stayed pending
resolution of the above-referenced High Court proceedings.
In a separate but related proceeding, in March 2011,
the Trustee of the IBM UK Trust was granted leave to initiate a claim before
the High Court in London against IBM UK and one member of the UK Trust
membership, seeking an order modifying certain documents and terms relating to
retirement provisions in IBM UK’s largest defined benefit plan (the C Plan)
dating back to 1983. The trial of these proceedings began in May 2012 and
finished in early June. On October 12, 2012, the High Court in London issued
its ruling, holding that the 1983 Trust Deeds and Rules should be modified to
allow certain categories of current IBM UK employees who are members of the C Plan
to retire from the age of 60 (rather than from the age of 63) without actuarial
reduction of their defined benefit pension. In a supplementary ruling on
December 13, 2012, the Court declined to similarly modify the Trust Deeds and
Rules for former employees who were C Plan members and who left the company
prior to retirement. On February 7, 2013, the Court issued an order agreed to
by all parties, under which there will be no appeals of the October 2012 and
December 2012 judgments. As a result of the October 2012 ruling, IBM recorded
an additional pre-tax retirement-related obligation of $162 million in the
third quarter of 2012.
In March 2011, the company announced that it had
agreed to settle a civil enforcement action with the Securities and Exchange
Commission (SEC) relating to activities by employees of IBM Korea, LG IBM, IBM
(China) Investment Company Limited and IBM Global Services (China) Co., Ltd.,
during the period from 1998 through 2009, allegedly in violation of the Foreign
Corrupt Practices Act of 1977. As part of that settlement, IBM consented to the
entry of a judgment relating to the books and records and internal control
provisions of the securities laws, and also agreed to pay a total of $10
million, categorized by the SEC as follows: (i) $5.3 million, representing
profits gained as a result of the conduct alleged in the SEC’s complaint, (ii)
prejudgment interest on that amount of $2.7 million, and (iii) a civil penalty
of $2 million. On July 25, 2013,
Notes to Consolidated Financial
Statements – (continued)
the court approved that 2011 settlement and required that
for a two-year period IBM make reports to the SEC and the court on certain
matters, including those relating to compliance with the FCPA. In early 2012, IBM notified
the SEC of an investigation by the Polish Central Anti-Corruption Bureau
involving allegations of illegal activity by a former IBM Poland employee in
connection with sales to the Polish government. IBM is cooperating with the SEC
and Polish authorities in this matter. In April 2013, IBM learned that the U.S.
Department of Justice (DOJ) is also investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine. The DOJ is also seeking information regarding the company's global FCPA
compliance program and its public sector business. The company is cooperating
with the DOJ in this matter.
In May 2013, IBM learned that the SEC is
conducting an investigation into how IBM reports cloud revenue. IBM is
cooperating with the SEC in this matter.
The company is a defendant in numerous actions filed
after January 1, 2008 in the Supreme Court for the State of New York, county of Broome, on behalf of hundreds of plaintiffs. The complaints allege numerous and
different causes of action, including for negligence and recklessness, private
nuisance and trespass. Plaintiffs in these cases seek medical monitoring and
claim damages in unspecified amounts for a variety of personal injuries and property
damages allegedly arising out of the presence of groundwater contamination and
vapor intrusion of groundwater contaminants into certain structures in which
plaintiffs reside or resided, or conducted business, allegedly resulting from
the release of chemicals into the environment by the company at its former
manufacturing and development facility in Endicott. These complaints also seek
punitive damages in an unspecified amount.
The company is party to, or otherwise involved in,
proceedings brought by U.S. federal or state environmental agencies under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
known as “Superfund,” or laws similar to CERCLA. Such statutes require
potentially responsible parties to participate in remediation activities
regardless of fault or ownership of sites. The company is also conducting
environmental investigations, assessments or remediations at or in the vicinity
of several current or former operating sites globally pursuant to permits,
administrative orders or agreements with country, state or local environmental
agencies, and is involved in lawsuits and claims concerning certain current or
former operating sites.
The
company is also subject to ongoing tax examinations and governmental
assessments in various jurisdictions. Along with many other U.S. companies doing business in Brazil, the company is involved in various challenges with
Brazilian authorities regarding non-income tax assessments and non-income tax
litigation matters. These matters include claims for taxes on the importation
of computer software. In November 2008, the company won a significant case in
the Superior Chamber of the federal administrative tax court in Brazil, and in late July 2009, the company received written confirmation regarding this
decision. The total potential amount related to the remaining matters for all
applicable years is approximately $700 million. The company believes it will
prevail on these matters and that this amount is not a meaningful indicator of
liability.
13. Commitments: The company’s extended lines of credit to
third-party entities include unused amounts of $5,359 million and $4,719 million at September 30,
2013 and December 31, 2012, respectively. A portion of these amounts was
available to the company’s business partners to support their working capital
needs. In addition, the company has committed to provide future financing to
its clients in connection with client purchase agreements for approximately
$1,692 million and
$1,513 million at
September 30, 2013 and December 31, 2012, respectively.
The company has applied the
guidance requiring a guarantor to disclose certain types of guarantees, even if
the likelihood of requiring the guarantor’s performance is remote. The
following is a description of arrangements in which the company is the
guarantor.
The company is a party to a variety
of agreements pursuant to which it may be obligated to indemnify the other
party with respect to certain matters. Typically, these obligations arise in
the context of contracts entered into by the company, under which the company
customarily agrees to hold the party harmless against losses arising from a
breach of representations and covenants related to such matters as title to the
assets sold, certain intellectual property (IP) rights, specified environmental
matters, third-party performance of non-financial contractual obligations and
certain income taxes. In each of these circumstances, payment by the company is
conditioned on the other party making a claim pursuant to the procedures
specified in the particular contract, which procedures typically allow the
company to challenge the other party’s claims. While typically indemnification
provisions do not include a contractual maximum on the company’s payment, the
company’s obligations under these agreements may be limited in terms of time
and/or nature of claim, and in some instances, the company may have recourse
against third parties for certain payments made by the company.
Notes to Consolidated Financial
Statements – (continued)
It is not possible to predict the
maximum potential amount of future payments under these or similar agreements,
due to the conditional nature of the company’s obligations and the unique facts
and circumstances involved in each particular agreement. Historically, payments
made by the company under these agreements have not had a material effect on
the company’s business, financial condition or results of operations.
In addition, the company guarantees
certain loans and financial commitments. The maximum potential future payment
under these financial guarantees was $52 million and $65 million at September 30,
2013 and December 31, 2012, respectively. The fair value of the guarantees
recognized in the Consolidated Statement of Financial Position is not material.
Changes in the company’s warranty
liability for standard warranties and deferred income for extended warranty
contracts are presented in the following tables:
|
|
|
|
|
|
|
|
|
Standard
Warranty Liability
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
Balance
at January 1
|
|
$
|
394
|
|
$
|
407
|
|
Current
period accruals
|
|
|
238
|
|
|
270
|
|
Accrual
adjustments to reflect actual experience
|
|
|
21
|
|
|
(18)
|
|
Charges
incurred
|
|
|
(292)
|
|
|
(295)
|
|
Balance
at September 30
|
|
$
|
362
|
|
$
|
364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended
Warranty Liability
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
Aggregate
deferred revenue at January 1
|
|
$
|
606
|
|
$
|
636
|
|
Revenue
deferred for new extended warranty contracts
|
|
|
204
|
|
|
191
|
|
Amortization
of deferred revenue
|
|
|
(244)
|
|
|
(240)
|
|
Other*
|
|
|
(7)
|
|
|
—
|
|
Aggregate
deferred revenue at September 30
|
|
$
|
559
|
|
$
|
587
|
|
|
|
|
|
|
|
|
|
Current
portion
|
|
$
|
283
|
|
$
|
284
|
|
Noncurrent
portion
|
|
|
276
|
|
|
302
|
|
Aggregate
deferred revenue at September 30
|
|
$
|
559
|
|
$
|
587
|
|
|
|
|
|
|
|
|
|
* Other primarily consists of foreign currency translation
adjustments.
|
|
|
|
|
|
|
|
|
14. Subsequent
Events: On October 29, 2013, the company announced that the Board of
Directors approved a quarterly dividend of $0.95 per common share. The dividend
is payable December 10, 2013 to shareholders of record on November 8, 2013.
On October 29, 2013,
the company announced that the Board of Directors authorized $15.0 billion in
additional funds for use in the company’s stock repurchase program.
Item 2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
Snapshot
Financial
Results Summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent/
|
|
|
(Dollars in millions except per share amounts)
|
|
|
|
|
|
|
|
|
Margin
|
|
|
For the three months ended September 30:
|
|
2013
|
|
|
2012
|
|
Change
|
|
|
Revenue
|
|
$
|
23,720
|
|
|
$
|
24,747
|
|
|
(4.1)
|
%*
|
|
Gross
profit margin
|
|
|
48.0
|
%
|
|
|
47.4
|
%
|
|
0.6
|
pts.
|
|
Total
expense and other income
|
|
$
|
6,567
|
|
|
$
|
6,657
|
|
|
(1.4)
|
%
|
|
Total
expense and other income to revenue ratio
|
|
|
27.7
|
%
|
|
|
26.9
|
%
|
|
0.8
|
pts.
|
|
Provision
for income taxes
|
|
$
|
772
|
|
|
$
|
1,251
|
|
|
(38.3)
|
%
|
|
Net
income
|
|
$
|
4,041
|
|
|
$
|
3,824
|
|
|
5.7
|
%
|
|
Net
income margin
|
|
|
17.0
|
%
|
|
|
15.5
|
%
|
|
1.6
|
pts.
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming
dilution
|
|
$
|
3.68
|
|
|
$
|
3.33
|
|
|
10.5
|
%
|
|
|
Basic
|
|
$
|
3.70
|
|
|
$
|
3.36
|
|
|
10.1
|
%
|
|
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming
dilution
|
|
|
1,098.8
|
|
|
|
1,149.3
|
|
|
(4.4)
|
%
|
|
|
Basic
|
|
|
1,090.9
|
|
|
|
1,137.2
|
|
|
(4.1)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* 1.6 percent decrease adjusted for currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency:
The
references to "adjusted for currency" or "at constant
currency" in the Management Discussion do not include operational impacts
that could result from fluctuations in foreign currency rates. Certain
financial results are adjusted based on a simple mathematical model that
translates current period results in local currency using the comparable prior
year period's currency conversion rate. This approach is used for countries
where the functional currency is the local country currency. This information
is provided so that certain financial results can be viewed without the impact
of fluctuations in foreign currency rates, thereby facilitating
period-to-period comparisons of business performance. See “Currency Rate
Fluctuations” on pages 72 and 73 for additional information.
Operating
(non-GAAP) Earnings:
In an effort to provide better transparency into the
operational results of the business, the company separates business results
into operating and non-operating categories. Operating earnings is a non-GAAP
measure that excludes the effects of certain acquisition-related charges and
retirement-related costs, and their related tax impacts. For acquisitions,
operating earnings exclude the amortization of purchased intangible assets and
acquisition-related charges such as in-process research and development,
transaction costs, applicable restructuring and related expenses and tax
charges related to acquisition integration. For retirement-related costs, the
company characterizes certain items as operating and others as non-operating.
The company includes defined benefit plan and nonpension postretirement benefit
plan service cost, amortization of prior service cost and the cost of defined
contribution plans in operating earnings. Non-operating retirement-related cost
includes defined benefit plan and nonpension postretirement benefit plan
interest cost, expected return on plan assets, amortized actuarial
gains/losses, the impacts of any plan curtailments/settlements and
multi-employer plan costs, pension insolvency costs and other costs.
Non-operating costs are primarily related to changes in pension plan assets and
liabilities which are tied to financial market performance and the company
considers these costs to be outside the operational performance of the
business.
Management Discussion –
(continued)
Overall, the company believes
that providing investors with a view of operating earnings as described above
provides increased transparency and clarity into both the operational results
of the business and the performance of the company’s pension plans; improves
visibility to management decisions and their impacts on operational performance;
enables better comparisons to peer companies; and allows the company to provide
a long-term strategic view of the business going forward. For its 2015 earnings
per share road map, the company is utilizing an operating view to establish its
objectives and track its progress. The company’s reportable segment financial
results reflect operating earnings, consistent with the company’s management
and measurement system.
The following tables provide the company’s (non-GAAP)
operating earnings for the third quarter and first nine months of 2013 and 2012.
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions except per share amounts)
|
|
|
|
|
|
|
Percent
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
Change
|
|
|
Net
income as reported
|
|
$
|
4,041
|
|
$
|
3,824
|
|
5.7
|
%
|
|
Non-operating
adjustments (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related
charges
|
|
|
166
|
|
|
141
|
|
17.9
|
|
|
|
Non-operating
retirement-related costs/(income)
|
|
|
181
|
|
|
191
|
|
(5.6)
|
|
|
Operating
(non-GAAP) earnings*
|
|
$
|
4,387
|
|
$
|
4,155
|
|
5.6
|
%
|
|
Diluted
operating (non-GAAP) earnings per share
|
|
$
|
3.99
|
|
$
|
3.62
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
* See pages 81 and 82 for a more detailed reconciliation
of net income to operating earnings.
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions except per share amounts)
|
|
|
|
|
|
|
Percent
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
Change
|
|
|
Net
income as reported
|
|
$
|
10,299
|
|
$
|
10,771
|
|
(4.4)
|
%
|
|
Non-operating
adjustments (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related
charges
|
|
|
479
|
|
|
399
|
|
20.0
|
|
|
|
Non-operating
retirement-related costs/(income)
|
|
|
564
|
|
|
328
|
|
72.2
|
|
|
Operating
(non-GAAP) earnings*
|
|
$
|
11,342
|
|
$
|
11,498
|
|
(1.4)
|
%
|
|
Diluted
operating (non-GAAP) earnings per share
|
|
$
|
10.21
|
|
$
|
9.90
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* See pages 81 and 82 for a more detailed reconciliation
of net income to operating earnings.
|
Financial
Performance Summary:
In the
third quarter of 2013, the company reported $23.7 billion in revenue, expanded
gross and net income margins and delivered diluted earnings per share growth of
10.5 percent as reported and 10.2 percent on an operating (non-GAAP) basis. The
company generated $3.8 billion in cash from operations and $2.2 billion in free
cash flow in the third quarter driving shareholder returns of $3.0 billion in
gross common stock repurchases and dividends. In October 2013, the company
stated that it expects full year 2013 GAAP diluted earnings per share of at
least $15.01, and reiterated its expectation for operating (non-GAAP) diluted
earnings per share of at least $16.25 on an “all in” basis, or at least $16.90 in
operating (non-GAAP) diluted earnings per share excluding the second quarter
workforce rebalancing charge of $1.0 billion.
The
company’s performance in the third quarter reflected the combination of
continued momentum in key growth areas, a better business mix, yield from
productivity initiatives, reductions in spending and performance-related compensation,
discrete tax benefits and an effective use of cash to deliver 10 percent growth
in earnings per share.
In the
third quarter, total Global Services revenue declined 2.8 percent as reported,
but returned to modest growth at constant currency, improving 1 percent versus
the prior year. Performance was driven by Global Business Services which
increased 0.4 percent as reported, but 5 percent adjusted for currency. The
Global Services backlog increased 2.5 percent (6 percent adjusted for
currency), also driven by Global Business Services. Software revenue improved
0.6 percent as reported and 2 percent at constant currency, led by key branded
middleware which increased 2.7 percent (4 percent adjusted for currency). In
Systems and Technology, revenue growth in System z mainframe of 6.3 percent (7
percent adjusted for currency) was more than offset by declines in Power
Systems, System x and Storage. Two-thirds of the overall decline in Systems and
Technology revenue (16.6 percent; 16 percent adjusted for currency) was driven
by the growth markets.
Across
the company, there was strong performance in the growth initiatives that
address key market trends – Smarter Planet, business analytics and cloud –
leveraging both organic investments and acquisitions. The Smarter Planet
solutions are up more than 20 percent and business analytics is up 8 percent
through the first nine months of the year compared to the prior
Management Discussion –
(continued)
year. In cloud, the company closed the acquisition of
SoftLayer in July, which significantly improves the company’s capabilities in
public and hybrid cloud solutions. In the third quarter, for the first time, the
company delivered more than $1 billion of cloud revenue in a quarter, of which
about $610 million was hardware, software and implementation services to
establish cloud-based operations within the customer set, and about $460
million was cloud delivered services and solutions, including SoftLayer. Within
the cloud delivered services and solution content, most of those customer
engagements represent incremental business for the company. Through the first
three quarters of the year, cloud revenue has increased more than 70 percent
versus the prior year.
From a
geographic perspective, the challenge in the third quarter was in the growth
markets – where revenue declined 8.8 percent (5 percent adjusted for currency).
The company’s performance in the growth markets has historically outpaced the
major markets by 8-10 points, but in the third quarter, for the first time, the
growth markets trailed the major markets. Performance in the growth markets
compared to the industry was driven about half by execution and half by a pause
in China as that country moves through the process to develop its new economic
plans. China declined 20.2 percent as reported and 22 percent at constant
currency. The Systems and Technology business was down approximately 40
percent at constant currency year to year in China. The systems hardware
performance in China accounted for all 5 points of the constant currency
revenue decline in the growth markets, and for 1.2 points of the 1.6 points of
constant currency decline in total consolidated revenue in the third quarter.
See the Geographic Revenue discussion on pages 58 to 60 for additional
information.
In the
third quarter, total consolidated revenue decreased 4.1 percent, 1.6 percent at
constant currency. Performance at constant currency was consistent with the
second quarter. Overall, currency impacted the company’s revenue growth by 2.5
points in the third quarter, a slightly larger impact than the first two
quarters of the year when the currency impact was approximately 2.0 points.
The
consolidated gross profit margin increased 0.6 points versus the third quarter
of 2012 to 48.0 percent. The operating (non-GAAP) gross profit margin increased
1.0 points to 49.1 percent. Performance was driven by margin expansion in both
Global Services segments and an improving segment mix.
Total
expense and other (income) decreased 1.4 percent in the third quarter compared
to the prior year. Total operating (non-GAAP) expense and other (income) was
flat versus the prior year. The key drivers of the year-to-year change in total
expense and other (income) were approximately:
|
|
|
|
Total
|
|
Operating
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
(non-GAAP)
|
|
|
|
|
|
|
|
|
Currency*
|
(1)
|
point
|
|
(1)
|
point
|
|
|
|
|
|
|
|
|
Acquisitions
**
|
2
|
points
|
|
2
|
points
|
|
|
|
|
|
|
|
|
Base
expense
|
(3)
|
points
|
|
(2)
|
points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Reflects impacts of translation and hedging programs.
|
|
|
**
|
Includes acquisitions completed in prior 12-month period;
operating (non-GAAP) is net of non-operating acquisition-related
|
|
|
|
charges.
|
There were several items that had a significant impact on
total expense and other (income) year-to-year. In the third quarter of 2012,
the company recorded $408 million in workforce rebalancing charges and a gain
of $447 million related to the divestiture of the Retail Store Solutions (RSS) business.
As a result, within selling, general and administrative expense, workforce
rebalancing charges were down nearly $400 million versus the prior year, and in
other (income) and expense, divestiture gains were down over $450 million
compared to the third quarter of 2012. The company has a performance-based
compensation structure. As a result of certain parts of the business not
performing as expected, performance-related compensation across both cost and
expense was down approximately $175 million year-to-year. Also, in the third
quarter of 2012, the company recorded a charge of $162 million related to a
court ruling in the United Kingdom (UK) regarding one of IBM UK’s defined
benefit pension plans. This charge was not included in the company’s operating
(non-GAAP) expense and other (income).
Pre-tax income declined 5.2 percent year to year and the
pre-tax margin was 20.3 percent. Net income increased 5.7 percent and the net
income margin was 17.0 percent, an increase of 1.6 points year to year. The
effective tax rate for the third quarter was 16.0 percent, compared to 24.6
percent in the prior year. The decrease in the tax rate was driven by discrete
benefits due to foreign tax audit activity, a reduction in the ongoing tax
rate, which the company now expects to be in the
Management Discussion –
(continued)
range
of 23 percent for the year, and the year to year impact of a higher rate in the
third quarter of 2012 on the gain from the RSS divestiture. Operating
(non-GAAP) pre-tax income declined 4.3 percent year to year and the operating
(non-GAAP) pre-tax margin was 22.3 percent. Operating (non-GAAP) net income
increased 5.6 percent and the operating (non-GAAP) net income margin of 18.5
percent increased 1.7 points compared to the prior year. The operating
(non-GAAP) effective tax rate was 17.0 percent versus 24.7 percent in the third
quarter of 2013 driven by the same factors described above. The net margin
improvement reflects the improved gross margin and savings from the second
quarter workforce rebalancing actions, tough minded spending actions and the
lower tax rate.
Diluted earnings per share of $3.68 increased 10.5 percent
versus the prior year. In the third quarter, the company repurchased 10.5
million shares of its common stock.
Operating (non-GAAP) diluted earnings per share of $3.99
increased $0.37 or 10.2 percent versus the third quarter of 2012 driven by the
following factors:
|
|
Revenue
decrease at actual rates:
|
$ (0.15)
|
|
|
Margin
expansion:
|
$ 0.35
|
|
|
Common
stock repurchases:
|
$ 0.17
|
The company generated $3,760
million in cash flow provided by operating activities, a decrease of $754
million compared to the third quarter of 2012, driven primarily by higher
workforce rebalancing payments ($340 million), changes in sales cycle working
capital ($156 million) and a decline in operational performance in the third
quarter of 2013 versus 2012. Net cash used in investing activities of $2,548
million increased $1,548 million primarily due to increased spending for
acquisitions ($2,041 million) and less cash received from divestitures ($339
million), partially offset by increased cash from net sales of marketable
securities and other investments ($909 million). Net cash used in financing
activities of $827 million decreased $1,679 million compared to the prior year,
primarily due to decreased cash used for common stock repurchases ($1,068
million) and higher net cash proceeds from total debt ($791 million).
Management Discussion –
(continued)
|
Financial Results Summary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent/
|
|
|
(Dollars in millions except per share amounts)
|
|
|
|
|
|
|
|
|
Margin
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
|
2012
|
|
Change
|
|
|
Revenue
|
|
$
|
72,052
|
|
|
$
|
75,203
|
|
|
(4.2)
|
%*
|
|
Gross
profit margin
|
|
|
47.5
|
%
|
|
|
46.7
|
%
|
|
0.7
|
pts.
|
|
Total
expense and other income
|
|
$
|
21,627
|
|
|
$
|
21,060
|
|
|
2.7
|
%
|
|
Total
expense and other income to revenue ratio
|
|
|
30.0
|
%
|
|
|
28.0
|
%
|
|
2.0
|
pts.
|
|
Provision
for income taxes
|
|
$
|
2,263
|
|
|
$
|
3,300
|
|
|
(31.4)
|
%
|
|
Net
income
|
|
$
|
10,299
|
|
|
$
|
10,771
|
|
|
(4.4)
|
%
|
|
Net
income margin
|
|
|
14.3
|
%
|
|
|
14.3
|
%
|
|
(0.0)
|
pts.
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming
dilution
|
|
$
|
9.27
|
|
|
$
|
9.27
|
|
|
0.0
|
%
|
|
|
Basic
|
|
$
|
9.35
|
|
|
$
|
9.38
|
|
|
(0.3)
|
%
|
|
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming
dilution
|
|
|
1,110.7
|
|
|
|
1,161.8
|
|
|
(4.4)
|
%
|
|
|
Basic
|
|
|
1,101.8
|
|
|
|
1,148.4
|
|
|
(4.1)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/13
|
|
|
12/31/12
|
|
|
|
|
|
Assets
|
|
$
|
117,845
|
|
|
$
|
119,213
|
|
|
(1.1)
|
%
|
|
Liabilities
|
|
$
|
97,837
|
|
|
$
|
100,229
|
|
|
(2.4)
|
%
|
|
Equity
|
|
$
|
20,008
|
|
|
$
|
18,984
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* 2.1 percent decrease adjusted for currency
|
Financial Performance Summary:
In the first nine months of 2013, the
company reported revenue of $72.1 billion and diluted earnings per share of
$9.27 as reported and $10.21 on an operating (non-GAAP) basis; excluding the
second quarter 2013 workforce rebalancing charge of $1.0 billion, operating
(non-GAAP) diluted earnings per share was $10.91. The earnings per share impact
of the second quarter workforce rebalancing charge reflects the company’s
ongoing annual effective tax rate and diluted shares outstanding. The company
generated $11.0 billion in cash from operations and $6.6 billion in free cash
flow in the first nine months of 2013 driving shareholder returns of $11.1
billion in gross common stock repurchases and dividends.
Total consolidated revenue decreased 4.2 percent (2 percent
adjusted for currency) compared to the first nine months of 2012. Software
revenue increased 1.5 percent (3 percent adjusted for currency) driven by key
branded middleware which increased 4.5 percent (6 percent adjusted for
currency). Within Global Services, Global Technology Services declined 4.4
percent (2 percent adjusted for currency), while Global Business Services
decreased 1.4 percent as reported, but increased 2 percent at constant
currency. Although Systems and Technology revenue declined 15.1 percent (14
percent adjusted for currency), System z mainframe revenue increased 8.0
percent (9 percent adjusted for currency). Global Financing revenue increased
0.7 percent (3 percent adjusted for currency). On a geographic basis, revenue
in the growth markets declined 3.1 percent (1 percent adjusted for currency)
and the major markets declined 4.5 percent (2 percent adjusted for currency).
The consolidated gross margin
increased 0.7 points versus the first nine months of 2012 to 47.5 percent. The
operating (non-GAAP) gross margin increased 1.2 points to 48.5 percent compared
to the prior year. The improvement in gross margin in the first nine months was
driven by Global Services and an improving segment mix.
Total expense and other (income)
increased 2.7 percent in the first nine months of 2013 compared to the prior
year. Total operating (non-GAAP) expense and other (income) increased 2.2
percent compared to the first nine months of 2012. The key drivers of the
year-to-year change in total expense and other (income) were approximately:
Management Discussion –
(continued)
|
|
|
|
Total
|
|
Operating
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
(non-GAAP)
|
|
|
|
|
|
|
|
|
Currency
*
|
(1)
|
point
|
|
(1)
|
point
|
|
|
|
|
|
|
|
|
Acquisitions**
|
2
|
points
|
|
2
|
points
|
|
|
|
|
|
|
|
|
Base
expense
|
1
|
point
|
|
1
|
point
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Reflects impacts of translation and hedging programs.
|
|
|
**
|
Includes acquisitions completed in prior 12-month period;
operating (non-GAAP) is net of non-operating acquisition-related
|
|
|
|
charges
|
There were several items that had an impact on total
expense and other (income) year to year. Workforce rebalancing charges for the
first nine months of 2013 were $1,048 million compared to $789 million in the
prior year. In the third quarter of 2012, the company recorded a gain of $447
million related to the divestiture of the RSS business. The company has a
performance-based compensation structure. As a result of certain parts of the
business not performing as expected, performance-related compensation across
both cost and expense was down approximately $700 million in the first nine
months of 2013 compared to the prior year. Also, in the third quarter of 2012,
the company recorded a charge of $162 million related to a court ruling in the UK regarding one of IBM UK’s defined benefit pension plans. This charge was not included in the
company’s operating (non-GAAP) expense and other (income).
Pre-tax income declined 10.7 percent year to year and the
pre-tax margin was 17.4 percent, a decrease of 1.3 points year to year. Net
income decreased 4.4 percent and the net income margin was 14.3 percent, flat
year to year. The effective tax rate for the first nine months was 18.0
percent, compared with 23.5 percent in the prior year. Operating (non-GAAP)
pre-tax income declined 7.4 percent year to year and the pre-tax margin was
19.4 percent, a decrease of 0.7 points versus the prior year. Operating
(non-GAAP) net income decreased 1.4 percent and the operating (non-GAAP) net
income margin of 15.7 percent increased 0.5 points versus the prior year. The
operating (non-GAAP) effective tax rate for the first nine months was 18.7
percent versus 23.7 percent in 2012.
Diluted earnings per share were flat versus the prior year.
Operating (non-GAAP) diluted earnings per share increased 3.1 percent. In the
first nine months of 2013, the company repurchased 39.9 million shares of its
common stock.
Operating (non-GAAP) diluted earnings per share of $10.21
increased $0.31 versus the first nine months of 2012 driven by the following
factors:
|
|
Revenue
decrease at actual rates:
|
$ (0.42)
|
|
|
Margin
expansion:
|
$ 0.28
|
|
|
Common
stock repurchases:
|
$ 0.45
|
At September 30,
2013, the company continues to have a high degree of financial flexibility with
a strong balance sheet to support its business objectives. Cash and marketable
securities at quarter end were $10,232 million, a decrease of $897 million from
December 31, 2012. Key drivers in the balance sheet and total cash flows are
highlighted below.
Total assets decreased $1,369 million (increased $334 million adjusted for
currency) from December 31, 2012 driven by:
·
Decreases in total receivables
($3,380 million), marketable securities ($557 million), cash and cash
equivalents ($340 million), and investments and sundry assets ($303 million);
partially offset by
·
Increased goodwill ($1,635
million), prepaid expenses and other current assets ($698 million) and prepaid
pension assets ($531 million).
Total liabilities decreased $2,392 million ($1,321 million adjusted for
currency) from December 31, 2012 driven by:
·
Decreases in retirement and
nonpension postretirement ($2,424 million), accounts payable ($1,689 million),
deferred income ($699 million) and compensation and benefits ($536 million);
partially offset by
·
Increased total debt ($2,911
million).
Management Discussion –
(continued)
Total equity of $20,008 million increased
$1,024 million from December 31, 2012 as a result of:
·
Higher retained earnings ($7,244
million), common stock ($1,094 million) and lower accumulated other
comprehensive loss ($788 million); partially offset by
·
Increased treasury stock ($8,109
million) driven by share repurchases.
The company generated
$10,957 million in cash flow provided by operating activities, a decrease of
$2,283 million when compared to the first nine months of 2012, primarily driven
by an increase in the use of cash related to the fulfillment of services
contracts ($497 million), a decrease in net income ($472 million), an increase
in payments for workforce re-balancing ($402 million), an increase in cash used
due to higher income tax payments ($384 million), a decrease in cash provided
by accounts receivable driven by lower collections ($376 million), and a net
decrease from compensation and benefit accruals/payments ($75 million) which
includes cash savings from the deferral of the 401(k) matching contribution of
$527 million. Net cash used in investing activities of $4,423 million was $489
million lower than the first nine months of 2012, primarily driven by an
increase in cash from net sales of marketable securities and other instruments
($942 million) and a decrease in cash used for capital expenditures ($617
million), partially offset by a net increase in cash used for
acquisitions/divestitures ($635 million) and a net decrease in cash provided by
non-operating financing receivables ($434 million). Net cash used in financing
activities of $6,870 million was $1,315 million lower compared to the first
nine months of 2012, primarily due to an increase in net cash from debt
transactions ($979 million) and a decrease in cash used for common stock
transactions ($554 million), partially offset by increased dividend payments
($217 million).
Management Discussion –
(continued)
Third
Quarter in Review
Results of Operations
Segment Details
The
following is an analysis of the third quarter and first nine months of 2013
versus the third quarter and first nine months of 2012 reportable segment
external revenue and gross margin results. Segment pre-tax income includes
transactions between the segments that are intended to reflect an arm’s-length
transfer price and excludes certain unallocated corporate items.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
Change
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
Percent/Margin
|
|
Adjusted For
|
|
|
For the three months ended September 30:
|
|
2013
|
|
|
2012
|
|
Change
|
|
Currency
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Technology Services
|
|
$
|
9,494
|
|
|
$
|
9,922
|
|
|
(4.3)
|
%
|
(1.1)
|
%
|
|
|
|
Gross
margin
|
|
|
39.0
|
%
|
|
|
37.3
|
%
|
|
1.7
|
pts.
|
|
|
|
|
Global
Business Services
|
|
|
4,558
|
|
|
|
4,542
|
|
|
0.4
|
%
|
4.5
|
%
|
|
|
|
Gross
margin
|
|
|
32.9
|
%
|
|
|
31.2
|
%
|
|
1.8
|
pts.
|
|
|
|
|
Software
|
|
|
5,798
|
|
|
|
5,763
|
|
|
0.6
|
%
|
1.7
|
%
|
|
|
|
Gross
margin
|
|
|
88.0
|
%
|
|
|
88.0
|
%
|
|
(0.0)
|
pts.
|
|
|
|
|
Systems
and Technology
|
|
|
3,247
|
|
|
|
3,895
|
|
|
(16.6)
|
%
|
(15.7)
|
%
|
|
|
|
Gross
margin
|
|
|
33.6
|
%
|
|
|
37.3
|
%
|
|
(3.6)
|
pts.
|
|
|
|
|
Global
Financing
|
|
|
502
|
|
|
|
472
|
|
|
6.5
|
%
|
9.3
|
%
|
|
|
|
Gross
margin
|
|
|
47.2
|
%
|
|
|
45.8
|
%
|
|
1.4
|
pts.
|
|
|
|
|
Other
|
|
|
122
|
|
|
|
154
|
|
|
(20.8)
|
%
|
(19.7)
|
%
|
|
|
|
Gross
margin
|
|
|
(211.6)
|
%
|
|
|
(80.4)
|
%
|
|
(131.2)
|
pts.
|
|
|
|
Total
consolidated revenue
|
|
$
|
23,720
|
|
|
$
|
24,747
|
|
|
(4.1)
|
%
|
(1.6)
|
%
|
|
Total
consolidated gross profit
|
|
$
|
11,380
|
|
|
$
|
11,732
|
|
|
(3.0)
|
%
|
|
|
|
|
Total
consolidated gross margin
|
|
|
48.0
|
%
|
|
|
47.4
|
%
|
|
0.6
|
pts.
|
|
|
|
Non-operating
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of acquired intangible assets
|
|
|
101
|
|
|
|
95
|
|
|
6.7
|
%
|
|
|
|
|
Acquisition-related
charges
|
|
|
1
|
|
|
|
0
|
|
|
nm
|
|
|
|
|
|
Retirement-related
costs/(income)
|
|
|
154
|
|
|
|
67
|
|
|
129.9
|
|
|
|
|
Operating
(non-GAAP) gross profit
|
|
$
|
11,636
|
|
|
$
|
11,894
|
|
|
(2.2)
|
%
|
|
|
|
|
Operating
(non-GAAP) gross margin
|
|
|
49.1
|
%
|
|
|
48.1
|
%
|
|
1.0
|
pts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm - not meaningful
|
Management Discussion –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
Change
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
Percent/Margin
|
|
Adjusted For
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
|
2012
|
|
Change
|
|
Currency
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Technology Services
|
|
$
|
28,634
|
|
|
$
|
29,952
|
|
|
(4.4)
|
%
|
(1.7)
|
%
|
|
|
|
Gross
margin
|
|
|
37.9
|
%
|
|
|
36.3
|
%
|
|
1.6
|
pts.
|
|
|
|
|
Global
Business Services
|
|
|
13,649
|
|
|
|
13,846
|
|
|
(1.4)
|
%
|
2.1
|
%
|
|
|
|
Gross
margin
|
|
|
30.9
|
%
|
|
|
30.0
|
%
|
|
0.9
|
pts.
|
|
|
|
|
Software
|
|
|
17,792
|
|
|
|
17,533
|
|
|
1.5
|
%
|
2.6
|
%
|
|
|
|
Gross
margin
|
|
|
88.0
|
%
|
|
|
87.8
|
%
|
|
0.2
|
pts.
|
|
|
|
|
Systems
and Technology
|
|
|
10,111
|
|
|
|
11,903
|
|
|
(15.1)
|
%
|
(14.3)
|
%
|
|
|
|
Gross
margin
|
|
|
34.4
|
%
|
|
|
36.7
|
%
|
|
(2.3)
|
pts.
|
|
|
|
|
Global
Financing
|
|
|
1,488
|
|
|
|
1,478
|
|
|
0.7
|
%
|
2.9
|
%
|
|
|
|
Gross
margin
|
|
|
46.4
|
%
|
|
|
47.5
|
%
|
|
(1.1)
|
pts.
|
|
|
|
|
Other
|
|
|
378
|
|
|
|
490
|
|
|
(22.8)
|
%
|
(22.3)
|
%
|
|
|
|
Gross
margin
|
|
|
(185.3)
|
%
|
|
|
(71.3)
|
%
|
|
(114.0)
|
pts.
|
|
|
|
Total
consolidated revenue
|
|
$
|
72,052
|
|
|
$
|
75,203
|
|
|
(4.2)
|
%
|
(2.1)
|
%
|
|
Total
consolidated gross profit
|
|
$
|
34,189
|
|
|
$
|
35,131
|
|
|
(2.7)
|
%
|
|
|
|
|
Total
consolidated gross margin
|
|
|
47.5
|
%
|
|
|
46.7
|
%
|
|
0.7
|
pts.
|
|
|
|
Non-operating
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of acquired intangible assets
|
|
|
285
|
|
|
|
276
|
|
|
3.3
|
%
|
|
|
|
|
Acquisition-
related charges
|
|
|
4
|
|
|
|
1
|
|
|
nm
|
|
|
|
|
|
Retirement-related
costs/(income)
|
|
|
474
|
|
|
|
204
|
|
|
132.9
|
|
|
|
|
Operating
(non-GAAP) gross profit
|
|
$
|
34,953
|
|
|
$
|
35,611
|
|
|
(1.9)
|
%
|
|
|
|
|
Operating
(non-GAAP) gross margin
|
|
|
48.5
|
%
|
|
|
47.4
|
%
|
|
1.2
|
pts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm - not meaningful
|
|
The following table presents each reportable segment’s external revenue as a
percentage of total segment external
|
|
revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Global
Technology Services
|
40.2
|
%
|
|
40.3
|
%
|
|
40.0
|
%
|
|
40.1
|
%
|
|
Global
Business Services
|
19.3
|
|
|
18.5
|
|
|
19.0
|
|
|
18.5
|
|
|
|
Total
Global Services
|
59.5
|
|
|
58.8
|
|
|
59.0
|
|
|
58.6
|
|
|
Software
|
24.6
|
|
|
23.4
|
|
|
24.8
|
|
|
23.5
|
|
|
Systems
and Technology
|
13.8
|
|
|
15.8
|
|
|
14.1
|
|
|
15.9
|
|
|
Global
Financing
|
2.1
|
|
|
1.9
|
|
|
2.1
|
|
|
2.0
|
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Management Discussion –
(continued)
|
The following table presents each reportable
segment’s pre-tax income as a percentage of total segment pre-tax income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Global
Technology Services
|
34.0
|
%
|
|
31.5
|
%
|
|
33.3
|
%
|
|
31.6
|
%
|
|
Global
Business Services
|
17.0
|
|
|
13.7
|
|
|
15.2
|
|
|
13.7
|
|
|
|
Total
Global Services
|
51.0
|
|
|
45.2
|
|
|
48.4
|
|
|
45.2
|
|
|
Software
|
43.2
|
|
|
43.7
|
|
|
45.8
|
|
|
43.4
|
|
|
Systems
and Technology
|
(3.0)
|
|
|
2.3
|
|
|
(4.8)
|
|
|
1.6
|
|
|
Global
Financing
|
8.8
|
|
|
8.8
|
|
|
10.5
|
|
|
9.7
|
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Global Services
In the
third quarter of 2013, the Global Services segments, Global Technology Services
(GTS) and Global Business Services (GBS), generated $14,052 million of revenue,
a decrease of 2.8 percent as reported, but an increase of 1 percent adjusted
for currency year to year, led by GBS. Revenue performance in the third quarter
reflected a one point sequential improvement at constant currency from the
second quarter of 2013. Pre-tax profit in the third quarter of 2013 was up 16.8
percent year to year and pre-tax margin improved 3.3 points with expansion in
both services segments. The Services segments continued to have good
performance in the growth initiatives of Smarter Planet, cloud and business
analytics. Total outsourcing revenue of $6,393 million decreased 5.5 percent (2
percent adjusted for currency) and total transactional revenue of $5,895
million was essentially flat as reported, but increased 4 percent adjusted for
currency year over year.
In the
first nine months of 2013, total Global Services revenue was $42,283 million, a
decrease of 3.5 percent (1 percent adjusted for currency) year to year. Revenue
in the growth markets decreased 0.7 percent as reported, but increased 2
percent adjusted for currency, while the major markets decreased 4.2 percent (1
percent adjusted for currency) year to year. Total outsourcing revenue of
$19,496 million decreased 5.2 percent (2 percent adjusted for currency) and
total transactional revenue of $17,476 million decreased 1.4 percent as
reported, but increased 2 percent at constant currency year to year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
Change
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
Adjusted For
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
Currency
|
|
|
Global
Services external revenue:
|
|
$
|
14,052
|
|
$
|
14,463
|
|
|
(2.8)
|
%
|
0.6
|
%
|
|
|
Global
Technology Services
|
|
$
|
9,494
|
|
$
|
9,922
|
|
|
(4.3)
|
%
|
(1.1)
|
%
|
|
|
|
Outsourcing
|
|
|
5,377
|
|
|
5,729
|
|
|
(6.1)
|
|
(2.8)
|
|
|
|
|
Integrated
Technology Services
|
|
|
2,353
|
|
|
2,384
|
|
|
(1.3)
|
|
1.8
|
|
|
|
|
Maintenance
|
|
|
1,764
|
|
|
1,808
|
|
|
(2.4)
|
|
0.3
|
|
|
|
Global
Business Services
|
|
$
|
4,558
|
|
$
|
4,542
|
|
|
0.4
|
%
|
4.5
|
%
|
|
|
|
Outsourcing
|
|
|
1,016
|
|
|
1,037
|
|
|
(2.0)
|
|
2.9
|
|
|
|
|
Consulting
and Systems Integration
|
|
|
3,542
|
|
|
3,505
|
|
|
1.1
|
|
5.0
|
|
Management Discussion –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
Change
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
Adjusted For
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
Currency
|
|
|
Global
Services external revenue:
|
|
$
|
42,283
|
|
$
|
43,798
|
|
|
(3.5)
|
%
|
(0.5)
|
%
|
|
|
Global
Technology Services
|
|
$
|
28,634
|
|
$
|
29,952
|
|
|
(4.4)
|
%
|
(1.7)
|
%
|
|
|
|
Outsourcing
|
|
|
16,407
|
|
|
17,445
|
|
|
(5.9)
|
|
(3.2)
|
|
|
|
|
Integrated
Technology Services
|
|
|
6,917
|
|
|
7,007
|
|
|
(1.3)
|
|
1.4
|
|
|
|
|
Maintenance
|
|
|
5,311
|
|
|
5,500
|
|
|
(3.4)
|
|
(1.1)
|
|
|
|
Global
Business Services
|
|
$
|
13,649
|
|
$
|
13,846
|
|
|
(1.4)
|
%
|
2.1
|
%
|
|
|
|
Outsourcing
|
|
|
3,089
|
|
|
3,130
|
|
|
(1.3)
|
|
2.8
|
|
|
|
|
Consulting
and Systems Integration
|
|
|
10,560
|
|
|
10,716
|
|
|
(1.5)
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Technology Services revenue of $9,494 million decreased 4.3 percent (1 percent
adjusted for currency) in the third quarter of 2013, however constant currency
revenue performance improved by 1 point from the second quarter reflecting the
addition of SoftLayer to the portfolio. GTS revenue decreased 4.4 percent (2
percent adjusted for currency) to $28,634 million in the first nine months of
2013. GTS Outsourcing revenue decreased 6.1 percent (3 percent adjusted for
currency) in the third quarter and decreased 5.9 percent (3 percent adjusted
for currency) in the first nine months of 2013, respectively, and continued to
be impacted by a decline in revenue from sales into existing base accounts and
from the structural work completed on lower margin contracts. Integrated
Technology Services (ITS) revenue decreased 1.3 percent (increased 2 percent
adjusted for currency) in the third quarter and decreased 1.3 percent
(increased 1 percent adjusted for currency) in the first nine months of 2013
with constant currency growth in both the major markets and growth markets.
SoftLayer contributed to the ITS revenue performance in the third quarter.
Global Business Services revenue of $4,558 million
increased 0.4 percent as reported (5 percent adjusted for currency) in the
third quarter of 2013 and gained share. This performance represents a 2 point
sequential improvement at constant currency from the second quarter of 2013 and
was driven by Consulting and Systems Integration. GBS had constant currency
revenue growth in all geographies, led by North America and Japan. Europe
returned to growth at constant currency for the first time since the beginning
of 2012. On an offering basis, GBS had good results across its portfolio. In
its solutions that address the Digital Front Office, GBS delivered double-digit
growth across the business analytics, Smarter Planet and cloud initiatives. In
addition, within the back office solutions that address the Globally Integrated
Enterprise, implementation services that support the traditional packaged
applications increased again in the third quarter at constant currency. In the
first nine months of 2013, GBS revenue of $13,649 million decreased 1.4 percent
as reported, but increased 2 percent adjusted for currency year to year. Application Outsourcing revenue decreased 2.0 percent
(increased 3 percent adjusted for currency) in the third quarter and decreased
1.3 percent (increased 3 percent adjusted for currency) in the first nine
months of 2013. Consulting and Systems Integration (C&SI) revenue increased
1.1 percent (5 percent adjusted for currency) in the third quarter of 2013,
representing a 3 point sequential improvement at constant currency from the
second quarter of 2013. C&SI revenue decreased 1.5 percent (increased 2
percent adjusted for currency) in the first nine months of 2013 year to year.
Management Discussion –
(continued)
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent/
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Margin
|
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
|
Global
Technology Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
gross profit
|
|
$
|
3,705
|
|
$
|
3,699
|
|
|
0.2
|
%
|
|
|
|
External
gross profit margin
|
|
|
39.0
|
%
|
|
37.3
|
%
|
|
1.7
|
pts.
|
|
|
|
Pre-tax
income
|
|
$
|
1,895
|
|
$
|
1,697
|
|
|
11.7
|
%
|
|
|
|
Pre-tax
margin
|
|
|
19.4
|
%
|
|
16.6
|
%
|
|
2.8
|
pts.
|
|
|
Global
Business Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
gross profit
|
|
$
|
1,501
|
|
$
|
1,415
|
|
|
6.1
|
%
|
|
|
|
External
gross profit margin
|
|
|
32.9
|
%
|
|
31.2
|
%
|
|
1.8
|
pts.
|
|
|
|
Pre-tax
income
|
|
$
|
948
|
|
$
|
738
|
|
|
28.4
|
%
|
|
|
|
Pre-tax
margin
|
|
|
20.0
|
%
|
|
15.6
|
%
|
|
4.4
|
pts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent/
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Margin
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Global
Technology Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
External
gross profit
|
|
$
|
10,842
|
|
$
|
10,868
|
|
|
(0.2)
|
%
|
|
|
External
gross profit margin
|
|
|
37.9
|
%
|
|
36.3
|
%
|
|
1.6
|
pts.
|
|
|
Pre-tax
income
|
|
$
|
4,994
|
|
$
|
4,934
|
|
|
1.2
|
%
|
|
|
Pre-tax
margin
|
|
|
17.0
|
%
|
|
16.0
|
%
|
|
1.0
|
pts.
|
|
Global
Business Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
External
gross profit
|
|
$
|
4,220
|
|
$
|
4,150
|
|
|
1.7
|
%
|
|
|
External
gross profit margin
|
|
|
30.9
|
%
|
|
30.0
|
%
|
|
0.9
|
pts.
|
|
|
Pre-tax
income
|
|
$
|
2,274
|
|
$
|
2,142
|
|
|
6.1
|
%
|
|
|
Pre-tax
margin
|
|
|
16.0
|
%
|
|
14.9
|
%
|
|
1.1
|
pts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GTS gross profit
margin improved 1.7 points in the third quarter and 1.6 points in the first
nine months of 2013, respectively, with margin expansion across all lines of
business. Pre-tax income increased 11.7
percent to $1,895 million and the pre-tax margin improved 2.8 points to 19.4
percent in the third quarter of 2013 year to year. Margin expansion was driven by lower year-to-year workforce
rebalancing charges, savings from the second-quarter 2013 workforce rebalancing
action, tough-minded spending actions and continued efficiency improvements.
GTS pre-tax income for the first nine months of 2013 increased 1.2 percent to
$4,994 million and pre-tax margin of 17.0 percent improved 1.0 points year to
year.
GBS
gross profit margin improved 1.8 points and 0.9 points in the third quarter and
first nine months, respectively, versus the prior year. GBS pre-tax income of $948 million in the third quarter of
2013 increased 28.4 percent with a pre-tax margin of 20.0 percent, an
improvement of 4.4 points year to year. The
drivers of the gross and pre-tax margin improvements included: lower
year-to-year workforce rebalancing charges, savings from the second-quarter
2013 workforce rebalancing action and tough-minded spending actions. GBS
pre-tax income in the first nine months of 2013 increased 6.1 percent to $2,274
million and pre-tax margin of 16.0 percent improved 1.1 points year to year.
Management Discussion –
(continued)
Global Services Backlog
The estimated
Global Services backlog at September 30, 2013 was $141 billion, an increase of
2.5 percent (6 percent adjusted for currency) compared to the September 30,
2012 balance, with growth across both the transactional and outsourcing
businesses. The estimated transactional backlog at September 30, 2013 increased
9.9 percent (13 percent adjusted for currency) and the estimated outsourcing
backlog increased 0.9 percent (4 percent adjusted for currency), respectively,
from the September 30, 2012 levels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
Change
|
|
|
|
|
|
At September 30,
|
|
At September 30,
|
|
|
Percent
|
|
|
Adjusted For
|
|
|
(Dollars in billions)
|
|
2013
|
|
2012
|
|
|
Change
|
|
|
Currency
|
|
|
Backlog:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
backlog
|
|
$
|
141.1
|
|
$
|
137.7
|
|
|
2.5
|
%
|
|
5.6
|
%
|
|
|
Outsourcing
backlog
|
|
$
|
90.1
|
|
$
|
89.3
|
|
|
0.9
|
%
|
|
4.3
|
%
|
Total Global Services
backlog includes GTS Outsourcing, ITS, GBS Outsourcing, Consulting and
Systems Integration and Maintenance. Outsourcing backlog includes GTS
Outsourcing and GBS Outsourcing. Transactional backlog includes ITS and
Consulting and Systems Integration. Total backlog is intended to be a statement
of overall work under contract and therefore does include Maintenance. Backlog
estimates are subject to change and are affected by several factors, including
terminations, changes in the scope of contracts, periodic revalidations,
adjustments for revenue not materialized and adjustments for currency.
Global Services
signings are management’s initial estimate of the value of a client’s
commitment under a Global Services contract. There are no third-party standards
or requirements governing the calculation of signings. The calculation used by
management involves estimates and judgments to gauge the extent of a client’s
commitment, including the type and duration of the agreement, and the presence
of termination charges or wind-down costs.
Signings
include GTS Outsourcing, ITS, GBS Outsourcing and Consulting and Systems
Integration contracts. Contract extensions and increases in scope are treated
as signings only to the extent of the incremental new value. Maintenance is not
included in signings as maintenance contracts tend to be more steady state,
where revenues equal renewals.
Contract
portfolios purchased in an acquisition are treated as positive backlog
adjustments provided those contracts meet the company’s requirements for
initial signings. A new signing will be recognized if a new services agreement
is signed incidental or coincidental to an acquisition or divestiture.
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
Change
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Percent
|
|
Adjusted For
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
Currency
|
|
|
Total
signings:
|
|
$
|
12,340
|
|
$
|
13,269
|
|
|
(7.0)
|
%
|
(4.1)
|
%
|
|
Outsourcing signings
|
|
$
|
6,095
|
|
$
|
7,300
|
|
|
(16.5)
|
%
|
(13.8)
|
%
|
|
Transactional signings
|
|
|
6,245
|
|
|
5,969
|
|
|
4.6
|
%
|
7.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
Change
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Percent
|
|
Adjusted For
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
Currency
|
|
|
Total
signings:
|
|
$
|
45,689
|
|
$
|
38,733
|
|
|
18.0
|
%
|
21.2
|
%
|
|
Outsourcing signings
|
|
$
|
25,729
|
|
$
|
19,542
|
|
|
31.7
|
%
|
34.7
|
%
|
|
Transactional signings
|
|
|
19,960
|
|
|
19,191
|
|
|
4.0
|
%
|
7.5
|
%
|
Management Discussion –
(continued)
|
Software
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
Change
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Percent
|
|
Adjusted For
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
Currency
|
|
|
Software
external revenue:
|
|
$
|
5,798
|
|
$
|
5,763
|
|
0.6
|
%
|
1.7
|
%
|
|
|
Middleware:
|
|
$
|
4,745
|
|
$
|
4,696
|
|
|
1.1
|
%
|
2.1
|
%
|
|
|
|
Key
branded middleware:
|
|
|
3,725
|
|
|
3,626
|
|
|
2.7
|
|
3.8
|
|
|
|
|
|
WebSphere
Family
|
|
|
|
|
|
|
|
|
0.5
|
|
1.4
|
|
|
|
|
|
Information
Management
|
|
|
|
|
|
|
|
|
1.6
|
|
2.6
|
|
|
|
|
|
Social
Workforce Solutions*
|
|
|
|
|
|
|
|
|
14.1
|
|
15.4
|
|
|
|
|
|
Tivoli
|
|
|
|
|
|
|
|
|
1.9
|
|
3.0
|
|
|
|
|
|
Rational
|
|
|
|
|
|
|
|
|
12.1
|
|
13.6
|
|
|
|
|
Other
middleware
|
|
|
1,021
|
|
|
1,070
|
|
|
(4.6)
|
|
(3.5)
|
|
|
|
Operating
systems
|
|
|
576
|
|
|
597
|
|
|
(3.5)
|
|
(2.2)
|
|
|
|
Other
|
|
|
476
|
|
|
470
|
|
|
1.4
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Formerly Lotus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
Change
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Percent
|
|
Adjusted For
|
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
Currency
|
|
|
|
Software
external revenue:
|
|
$
|
17,792
|
|
$
|
17,533
|
|
|
1.5
|
%
|
2.6
|
%
|
|
|
|
Middleware:
|
|
$
|
14,613
|
|
$
|
14,280
|
|
|
2.3
|
%
|
3.4
|
%
|
|
|
|
|
Key
branded middleware:
|
|
|
11,530
|
|
|
11,038
|
|
|
4.5
|
|
5.5
|
|
|
|
|
|
|
WebSphere
Family
|
|
|
|
|
|
|
|
|
5.2
|
|
6.1
|
|
|
|
|
|
|
Information
Management
|
|
|
|
|
|
|
|
|
1.8
|
|
2.8
|
|
|
|
|
|
|
Social
Workforce Solutions*
|
|
|
|
|
|
|
|
|
14.7
|
|
16.0
|
|
|
|
|
|
|
Tivoli
|
|
|
|
|
|
|
|
|
5.7
|
|
6.8
|
|
|
|
|
|
|
Rational
|
|
|
|
|
|
|
|
|
7.6
|
|
8.9
|
|
|
|
|
|
Other
middleware
|
|
|
3,083
|
|
|
3,242
|
|
|
(4.9)
|
|
(3.8)
|
|
|
|
|
Operating
systems
|
|
|
1,760
|
|
|
1,816
|
|
|
(3.1)
|
|
(1.8)
|
|
|
|
|
Other
|
|
|
1,419
|
|
|
1,438
|
|
|
(1.3)
|
|
(0.4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Formerly Lotus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software revenue of
$5,798 million increased 0.6 percent (2 percent adjusted for currency) in the
third quarter and increased 1.5 percent (3 percent adjusted for currency) to
$17,792 million in the first nine months of 2013, respectively, led by growth
in key branded middleware.
Key branded middleware
revenue, which accounted for 64 percent of total Software revenue in the third
quarter of 2013, increased 2.7 percent (4 percent adjusted for currency) year
to year and held share. Performance in the third quarter was stronger in the
infrastructure layer, including solutions for data management, application
server, security, mobile and Rational development tools. In the first nine
months of 2013, key branded middleware revenue increased 4.5 percent (6 percent
adjusted for currency) year to year and accounted for 65 percent of total
Software revenue.
WebSphere revenue increased 0.5 percent (1 percent adjusted for currency) and
5.2 percent (6 percent adjusted for currency) in the third quarter and first
nine months of 2013 year to year, respectively. Revenue performance in the
third quarter included strength in the mobile portfolio and good performance in
application server.
Information Management revenue increased 1.6 percent
(3 percent adjusted for currency) and 1.8 percent (3 percent adjusted for
currency) in the third quarter and first nine months of 2013 year to year,
respectively. Performance in the third quarter was led by double-digit constant
currency growth in the distributed database offerings.
Tivoli revenue increased 1.9 percent (3 percent
adjusted for currency) in the third quarter and 5.7 percent (7 percent adjusted
for currency) in the first nine months of 2013, compared to the prior year
periods driven by storage growth and the security solutions portfolio. Tivoli
security revenue increased 18 percent (20 percent adjusted for currency) in the
third
Management Discussion –
(continued)
quarter of 2013 and 17 percent (18 percent
adjusted for currency) in the first nine months of 2013. The acquisition of
Trusteer in the third quarter extends Tivoli’s data security capabilities
further into cloud and mobile environments. Tivoli storage, which enables
customers to manage their rapidly growing data, was up 7 percent (9 percent
adjusted for currency) in the third quarter and 11 percent (12 percent adjusted
for currency) in the first nine months of 2013 year to year, respectively.
Social Workforce Solutions revenue increased 14.1 percent
(15 percent adjusted for currency) in the third quarter and 14.7 percent (16
percent adjusted for currency) in the first nine months of 2013, respectively.
Performance in both periods was driven by Kenexa, which provides cloud-based
recruiting and talent management.
Rational revenue
increased 12.1 percent (14 percent adjusted for currency) year to year in the
third quarter and increased 7.6 percent (9 percent adjusted for currency) in
the first nine months of 2013. Rational’s DevOps solution leverages the
company’s cloud capabilities for the rapid and iterative deployment of
software.
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
Percent/
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Margin
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Software:
|
|
|
|
|
|
|
|
|
|
|
|
|
External
gross profit
|
|
$
|
5,101
|
|
$
|
5,073
|
|
|
0.6
|
%
|
|
|
External
gross profit margin
|
|
|
88.0
|
%
|
|
88.0
|
%
|
|
(0.0)
|
pts.
|
|
|
Pre-tax
income
|
|
$
|
2,410
|
|
$
|
2,355
|
|
|
2.3
|
%
|
|
|
Pre-tax
margin
|
|
|
36.8
|
%
|
|
35.6
|
%
|
|
1.2
|
pts.
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
Percent/
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Margin
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Software:
|
|
|
|
|
|
|
|
|
|
|
|
|
External
gross profit
|
|
$
|
15,663
|
|
$
|
15,398
|
|
|
1.7
|
%
|
|
|
External
gross profit margin
|
|
|
88.0
|
%
|
|
87.8
|
%
|
|
0.2
|
pts.
|
|
|
Pre-tax
income
|
|
$
|
6,867
|
|
$
|
6,793
|
|
|
1.1
|
%
|
|
|
Pre-tax
margin
|
|
|
34.2
|
%
|
|
34.0
|
%
|
|
0.2
|
pts.
|
The
Software gross profit margin of 88.0 percent in both the third quarter and
first nine months of 2013 was essentially flat compared to the prior year
periods. Software pre-tax income of $2,410 in the third quarter of 2013
increased 2.3 percent year to year, with a pre-tax margin of 36.8 percent, an
improvement of 1.2 points. Segment pre-tax income for the first nine months of
2013 increased 1.1 percent to $6,867 million with a pre-tax margin of 34.2
percent. The relative strength of the Software business continues to contribute
to the company’s improved gross and net margins.
|
Systems
and Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
Change
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Percent
|
|
Adjusted For
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
Currency
|
|
|
Systems
and Technology external revenue:
|
|
$
|
3,247
|
|
$
|
3,895
|
|
|
(16.6)
|
%
|
(15.7)
|
%
|
|
|
System
z
|
|
|
|
|
|
|
|
|
6.3
|
%
|
7.0
|
%
|
|
|
Power
Systems
|
|
|
|
|
|
|
|
|
(37.6)
|
|
(36.9)
|
|
|
|
System
x
|
|
|
|
|
|
|
|
|
(17.6)
|
|
(16.4)
|
|
|
|
Storage
|
|
|
|
|
|
|
|
|
(11.4)
|
|
(9.8)
|
|
|
|
|
Total
Systems excluding RSS
|
|
|
|
|
|
|
|
|
(18.2)
|
|
(17.1)
|
|
|
|
Microelectronics
OEM
|
|
|
|
|
|
|
|
|
1.3
|
|
1.3
|
|
|
|
|
Total
Systems and Technology excluding RSS
|
|
|
|
|
|
|
|
(15.9)
|
|
(15.0)
|
|
|
|
Retail
Store Solutions (Divested)
|
|
|
|
|
|
|
|
|
(98.3)
|
|
(98.3)
|
|
Management Discussion –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
Change
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Percent
|
|
Adjusted For
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
Currency
|
|
|
Systems
and Technology external revenue:
|
|
$
|
10,111
|
|
$
|
11,903
|
|
|
(15.1)
|
%
|
(14.3)
|
%
|
|
|
System
z
|
|
|
|
|
|
|
|
|
8.0
|
%
|
8.8
|
%
|
|
|
Power
Systems
|
|
|
|
|
|
|
|
|
(31.3)
|
|
(30.7)
|
|
|
|
System
x
|
|
|
|
|
|
|
|
|
(12.6)
|
|
(11.8)
|
|
|
|
Storage
|
|
|
|
|
|
|
|
|
(9.6)
|
|
(8.5)
|
|
|
|
|
Total
Systems excluding RSS
|
|
|
|
|
|
|
|
|
(13.6)
|
|
(12.8)
|
|
|
|
Microelectronics
OEM
|
|
|
|
|
|
|
|
|
(2.8)
|
|
(2.7)
|
|
|
|
|
Total
Systems and Technology excluding RSS
|
|
|
|
|
|
|
|
(12.5)
|
|
(11.7)
|
|
|
|
Retail
Store Solutions (Divested)
|
|
|
|
|
|
|
|
|
(99.2)
|
|
(99.2)
|
|
Systems and Technology
revenue decreased 16.6 percent (16 percent adjusted for currency) and
15.1 percent (14 percent adjusted for currency) in the third quarter and
first nine months of 2013, respectively, versus the same periods in 2012.
Adjusting for the divested RSS business, revenue declined 15.9 percent (15
percent adjusted for currency) and 12.5 percent (12 percent adjusted for
currency) in the third quarter and first nine months of 2013, respectively,
versus the same periods in 2012. In the third quarter, the growth markets
performance drove two-thirds of the revenue decline – approximately half of
which was China, impacting each of the systems brands.
System z revenue increased 6.3 percent and 8.0 percent (7 percent
and 9 percent adjusted for currency) in the third quarter and first nine
months of 2013 versus the third quarter and first nine months of 2012, respectively.
MIPS (millions of instructions per second) shipments increased 56 percent
and 35 percent in the third quarter and first nine months of 2013 versus the
same periods of 2012, respectively. The increase in MIPS in both periods was
driven by specialty engines, which continue to be more than 50 percent of the
total volumes and have increased significantly year to year, including more
than 90 percent growth in the third quarter. In the third quarter, the company
successfully launched the new zEnterprise mid-range server, which delivers over
50 percent more capacity than its predecessor.
Power Systems revenue decreased 37.6 percent and 31.3 percent
(37 percent and 31 percent adjusted for currency) in the third
quarter and first nine months of 2013 versus the third quarter and first nine
months of 2012, respectively. High Performance Computing accounted for 10 points
and 9 points of the revenue decline in the third quarter and first nine months
of 2013, respectively, compared to the prior year periods. To improve future
performance, the company is continuing to invest to expand its Power
platform to address the Linux opportunity, which is now larger than UNIX, and
growing more rapidly.
System x revenue decreased 17.6 percent
and 12.6 percent (16 percent and 12 percent adjusted for currency) in the third
quarter and first nine months of 2013 versus the third quarter and first nine
months of 2012, respectively. High-end System x revenue decreased 5.1 percent
and 11.1 percent (4 percent and 10 percent adjusted for currency) in the third
quarter and first nine months of 2013 versus the comparable periods of 2012,
respectively.
PureSystems continues to gain momentum. In the major markets, revenue increased
more than 30 percent sequentially. Globally, the company shipped over 2,000
systems in third quarter, with over 8,000 total shipments since announcement.
Storage revenue decreased 11.4 percent and 9.6 percent (10
percent and 8 percent adjusted for currency) in the third quarter and first
nine months of 2013 versus the comparable periods in 2012, respectively. The
revenue decline was driven by the growth markets, while revenue in the major
markets increased. Double-digit growth in the Storwize products and continued
growth in the company’s flash solutions, in both periods, were more than offset
by declines in the legacy OEM mid-range offerings and softness in high-end
offerings.
Microelectronics OEM revenue increased 1.3 percent and decreased 2.8 percent
(up 1 percent and down 3 percent adjusted for currency) in the third quarter
and first nine months of 2013 versus the comparable periods of 2012,
respectively.
Management Discussion –
(continued)
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
Percent/
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Margin
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Systems
and Technology:
|
|
|
|
|
|
|
|
|
|
|
|
|
External
gross profit
|
|
$
|
1,092
|
|
$
|
1,451
|
|
|
(24.7)
|
%
|
|
|
External
gross profit margin
|
|
|
33.6
|
%
|
|
37.3
|
%
|
|
(3.6)
|
pts.
|
|
|
Pre-tax
income
|
|
$
|
(167)
|
|
$
|
124
|
|
|
nm
|
|
|
|
Pre-tax
margin
|
|
|
(4.9)
|
%
|
|
3.0
|
%
|
|
(7.9)
|
pts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm - not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
Percent/
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Margin
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
System
and Technology:
|
|
|
|
|
|
|
|
|
|
|
|
|
External
gross profit
|
|
$
|
3,475
|
|
$
|
4,363
|
|
|
(20.4)
|
%
|
|
|
External
gross profit margin
|
|
|
34.4
|
%
|
|
36.7
|
%
|
|
(2.3)
|
pts.
|
|
|
Pre-tax
income
|
|
$
|
(713)
|
|
$
|
253
|
|
|
nm
|
|
|
|
Pre-tax
margin
|
|
|
(6.8)
|
%
|
|
2.0
|
%
|
|
(8.8)
|
pts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm - not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems and Technology’s gross
profit margin decreased 3.6 points in the third quarter of 2013 versus the
prior year. The decrease was driven by lower margins in Power Systems (1.2
points), Microelectronics (0.9 points), Storage (0.7 points) and a decline due
to revenue mix (0.7 points). Gross profit margin for the first nine months of
2013 decreased 2.3 points compared to the first nine months of 2012. The
decrease was driven by lower margins in Power Systems (0.8 points),
Microelectronics (0.8 points) and System x (0.8 points), partially offset by an
improvement due to revenue mix (0.2 points).
Systems and Technology’s pre-tax
income decreased $291 million to a loss of $167 million in the third quarter,
and $966 million to a loss of $713 million for the first nine months of 2013,
when compared to the prior year periods. Pre-tax margin decreased 7.9 points in
the third quarter and 8.8 points in the first nine months, respectively, versus
the prior year periods.
Global
Financing
See pages 75 to 80 for a discussion of Global Financing’s segment
results.
Geographic Revenue
In addition to the revenue presentation by
reportable segment, the company also measures revenue performance on a
geographic basis. The following geographic, regional and country-specific
revenue performance excludes OEM revenue, which is discussed separately on
pages 59 and 60.
Management Discussion –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
Change
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Percent
|
|
Adjusted For
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
Currency
|
|
|
Total
Revenue
|
|
$
|
23,720
|
|
$
|
24,747
|
|
|
(4.1)
|
%
|
(1.6)
|
%
|
|
|
Geographies:
|
|
$
|
23,186
|
|
$
|
24,209
|
|
|
(4.2)
|
%
|
(1.7)
|
%
|
|
|
|
Americas
|
|
|
10,305
|
|
|
10,448
|
|
|
(1.4)
|
|
(0.2)
|
|
|
|
|
Europe/Middle
East/Africa (EMEA)
|
|
|
7,334
|
|
|
7,238
|
|
|
1.3
|
|
(1.6)
|
|
|
|
|
Asia
Pacific
|
|
|
5,547
|
|
|
6,523
|
|
|
(15.0)
|
|
(4.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major
markets
|
|
|
|
|
|
|
|
|
(2.7)
|
%
|
(0.6)
|
%
|
|
|
Growth
markets
|
|
|
|
|
|
|
|
|
(8.8)
|
%
|
(5.1)
|
%
|
|
|
|
BRIC
countries
|
|
|
|
|
|
|
|
|
(14.8)
|
%
|
(11.9)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
Change
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Percent
|
|
Adjusted For
|
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
Currency
|
|
|
|
Total
Revenue
|
|
$
|
72,052
|
|
$
|
75,203
|
|
|
(4.2)
|
%
|
(2.1)
|
%
|
|
|
|
Geographies:
|
|
$
|
70,553
|
|
$
|
73,644
|
|
|
(4.2)
|
%
|
(2.0)
|
%
|
|
|
|
|
Americas
|
|
|
31,056
|
|
|
32,006
|
|
|
(3.0)
|
|
(2.1)
|
|
|
|
|
|
Europe/Middle
East/Africa (EMEA)
|
|
|
22,451
|
|
|
22,684
|
|
|
(1.0)
|
|
(2.2)
|
|
|
|
|
|
Asia
Pacific
|
|
|
17,046
|
|
|
18,953
|
|
|
(10.1)
|
|
(1.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major
markets
|
|
|
|
|
|
|
|
|
(4.5)
|
%
|
(2.4)
|
%
|
|
|
|
Growth
markets
|
|
|
|
|
|
|
|
|
(3.1)
|
%
|
(0.9)
|
%
|
|
|
|
|
BRIC
countries
|
|
|
|
|
|
|
|
|
(5.6)
|
%
|
(3.2)
|
%
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
geographic revenue of $23,186 million decreased 4.2 percent (2 percent adjusted
for currency) in the third quarter of 2013 compared to the prior year. Revenue
for the quarter decreased year to year in both the major markets and growth
markets, although the major markets improved their growth rate by almost 2
points compared to the second quarter of 2013. This was the best major markets
performance since the first quarter of 2012.
In the third quarter, growth markets revenue decreased 8.8 percent as reported
and 5 percent at constant currency. Although the company continued to gain
share and deliver growth in Latin America, as well as Middle East and Africa,
the company fell short of its objectives and the market in the other regions.
Performance in the growth markets compared to industry was driven about half by
execution and half by a pause in China. China declined 20.2 percent as reported
and 22 percent at constant currency. The company experienced a slow down in
demand across the board, but most significantly in hardware which was down approximately
40 percent at constant currency, and which makes up approximately 40 percent of
the company’s business in China. While the company had some execution problems
during the third quarter, the business was impacted by the process surrounding
China’s development of a broad-based economic reform plan – which will be
available in mid-November. Demand from state-owned enterprises and the public
sector has slowed significantly, as decision-making and procurement cycles have
lengthened. The company believes that the changes will take time to implement
and does not expect demand in China to pick up until after the first quarter of
2014. Overall, the hardware performance in China accounted for all 5 points of
the constant currency revenue decline in the growth markets, and for 1.2 points
of the 1.6 points of the constant currency decline in total revenue in the
third quarter. Regarding execution in the growth markets, the company
understands the issues and has already taken management actions to improve
performance. The company is confident that it can get its growth market
performance back on track, and expects a change in trajectory starting in the
fourth quarter and a return to revenue growth early in 2014.
Americas revenue decreased 1.4 percent (flat adjusted for currency) compared to
the third quarter of 2012. This represents a 3 point improvement at constant
currency compared to the second quarter growth rate. Within the major market
countries, the U.S. was down 1.1 percent and Canada was down 6.3 percent (2
percent adjusted for currency). While the U.S. and Canada continue to report
year-to-year decreases, both countries have improved their revenue growth rate
at constant currency by 3 points compared to the second quarter of 2013.
Revenue in the Latin America growth markets increased 3.3 percent (10 percent
adjusted for currency), with Brazil down 1.3 percent as reported, but up 7
percent at constant currency and Mexico up 19.4 percent (19 percent adjusted
for currency) year to year.
Management Discussion –
(continued)
Europe/Middle East/Africa (EMEA) revenue increased 1.3 percent as reported
(decreased 2 percent adjusted for currency) year to year in the third quarter
of 2013, relatively consistent with the second quarter performance. Western
Europe showed some stability, while Eastern Europe, led by Russia, had
double-digit declines at constant currency. The major markets increased 2.1
percent as reported, but declined 2 percent at constant currency. Within the
major market countries, Germany grew 2.1 percent (decreased 3 percent at
constant currency) and Italy increased 4.6 percent (decreased 1 percent at
constant currency). The UK decreased 1.4 percent, but was flat year to year on
a constant currency basis. Revenue in the EMEA growth markets decreased 4.2
percent (2 percent adjusted for currency) led by Russia which declined 28.5
percent (28 percent adjusted for currency), partially offset by strength in
Middle East and Africa which increased 4.3 percent (11 percent adjusted for
currency).
Asia
Pacific third quarter revenue decreased 15.0 percent (4 percent adjusted for
currency) year over year. Japan revenue decreased 16.9 percent as reported, but
increased 5 percent on a constant currency basis, with good performance across
hardware, software and services. Adjusted for currency, this was the
fourth consecutive quarter of revenue growth in Japan. The Asia Pacific growth
markets decreased 13.6 percent (10 percent adjusted for currency) driven by
China and Australia which declined 19.2 percent (8 percent adjusted for
currency). India decreased 10.8 percent as reported, but increased 1 percent at
constant currency.
Total
geographic revenue of $70,553 million for the first nine months of 2013
decreased 4.2 percent (2 percent adjusted for currency) compared to the prior
year. Total revenue from the growth markets, which represented approximately 24
percent of the total geographic revenue for the first nine months of the year,
decreased 3.1 percent on a year-to-year basis (1 percent adjusted for
currency). Within the BRIC countries, combined revenue was down 5.6 percent (3
percent adjusted for currency). In the first nine months of the year, the
company had strength in Latin America and the Middle East and Africa region.
However, declines in some of the larger growth markets, for example China and
Australia, have impacted the overall performance in the growth markets.
Americas revenue for the first nine months of 2013 decreased 3.0 percent (2
percent adjusted for currency) compared to the prior year. The major market
countries were down 4.1 percent (4 percent adjusted for currency), partially
offset by an increase in the Latin America growth markets of 6.4 percent (12
percent adjusted for currency). Within the major market countries, the U.S. was
down 3.6 percent and Canada was down 7.0 percent (5 percent adjusted for
currency). Within the Latin America growth market countries, Brazil increased
3.9 percent (11 percent adjusted for currency) and Mexico increased 13.2
percent (13 percent adjusted for currency).
Europe/Middle East/Africa (EMEA) revenue decreased 1.0 percent (2 percent
adjusted for currency) for the first nine months of 2013 compared to the prior
year. The major market countries were down 1.1 percent (3 percent adjusted for
currency), while the growth market countries were down 0.7 percent (up 1
percent adjusted for currency). In the major market countries, the UK decreased
3.2 percent (1 percent adjusted for currency), Germany decreased 1.6 percent (4
percent adjusted for currency), France decreased 1.0 percent (4 percent
adjusted for currency), Italy decreased 0.4 percent (3 percent adjusted for
currency), while Spain increased 2.5 percent (flat at constant currency).
Asia
Pacific revenue decreased 10.1 percent (2 percent adjusted for currency) year
to year for the first nine months of 2013. Japan revenue decreased 14.9 percent
as reported, but increased 4 percent on a constant currency basis. The Asia
Pacific growth markets decreased 6.6 percent (5 percent adjusted for currency),
with China down 8.4 percent (10 percent adjusted for currency) and Australia
down 13.6 percent (9 percent adjusted for currency).
OEM
revenue decreased 0.7 percent (flat adjusted for currency) and decreased 3.9
percent (3 percent adjusted for currency) year to year in the third quarter and
the first nine months of 2013, respectively, driven by the Microelectronics OEM
business.
Management Discussion –
(continued)
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Expense and Other Income
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
For the three months ended September
30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Total
consolidated expense and other (income)
|
|
$
|
6,567
|
|
$
|
6,657
|
|
(1.4)
|
%
|
|
Non-operating
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of acquired intangible assets
|
|
|
(100)
|
|
|
(83)
|
|
19.9
|
|
|
|
Acquisition-related
charges
|
|
|
(12)
|
|
|
(9)
|
|
27.7
|
|
|
|
Non-operating
retirement-related (costs)/income
|
|
|
(103)
|
|
|
(191)
|
|
(45.9)
|
|
|
Total
operating (non-GAAP) expense and other (income)
|
|
$
|
6,352
|
|
$
|
6,374
|
|
(0.3)
|
%
|
|
Total
consolidated expense-to-revenue ratio
|
|
|
27.7
|
%
|
|
26.9
|
%
|
0.8
|
pts.
|
|
Operating
(non-GAAP) expense-to-revenue ratio
|
|
|
26.8
|
%
|
|
25.8
|
%
|
1.0
|
pts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
For the nine months ended September
30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Total
consolidated expense and other (income)
|
|
$
|
21,627
|
|
$
|
21,060
|
|
2.7
|
%
|
|
Non-operating
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of acquired intangible assets
|
|
|
(277)
|
|
|
(241)
|
|
14.7
|
|
|
|
Acquisition-related
charges
|
|
|
(25)
|
|
|
(23)
|
|
5.5
|
|
|
|
Non-operating
retirement-related (costs)/income
|
|
|
(329)
|
|
|
(251)
|
|
31.2
|
|
|
Total
operating (non-GAAP) expense and other (income)
|
|
$
|
20,997
|
|
$
|
20,545
|
|
2.2
|
%
|
|
Total
consolidated expense-to-revenue ratio
|
|
|
30.0
|
%
|
|
28.0
|
%
|
2.0
|
pts.
|
|
Operating
(non-GAAP) expense-to-revenue ratio
|
|
|
29.1
|
%
|
|
27.3
|
%
|
1.8
|
pts.
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expense and other (income) decreased 1.4 percent in the third quarter and
increased 2.7 percent in the first nine months of 2013 compared to the prior
year periods. Total operating (non-GAAP) expense and other (income) decreased
0.3 percent in the third quarter and increased 2.2 percent in the first nine
months of 2013 compared to the third quarter and first nine months of 2012,
respectively. The key drivers of the year-to-year change in total expense and
other (income) were approximately:
|
|
|
Total Consolidated
|
|
|
Operating (non-GAAP)
|
|
|
For the three and nine months ended September 30, 2013:
|
|
Three Months
|
|
Nine Months
|
|
Three Months
|
|
Nine Months
|
|
Currency*
|
|
(1)
|
pt.
|
|
(1)
|
pt.
|
|
(1)
|
pt.
|
|
(1)
|
pt.
|
|
Acquisitions**
|
|
2
|
pts.
|
|
2
|
pts.
|
|
2
|
pts.
|
|
2
|
pts.
|
|
Base
expense
|
|
(3)
|
pts.
|
|
1
|
pt.
|
|
(2)
|
pts.
|
|
1
|
pt.
|
* Reflects impacts of translation and
hedging programs.
** Includes acquisitions completed in
prior 12-month period; operating (non-GAAP) is net of non-operating
acquisition-related
charges.
For additional information regarding total expense
and other income for both expense presentations, see the following analyses by
category.
Management Discussion –
(continued)
|
Selling, general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
For the three months ended September
30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Selling,
general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative – other
|
|
$
|
4,456
|
|
$
|
4,588
|
|
(2.9)
|
%
|
|
|
Advertising
and promotional expense
|
|
|
300
|
|
|
330
|
|
(9.1)
|
|
|
|
Workforce
rebalancing charges
|
|
|
18
|
|
|
408
|
|
(95.6)
|
|
|
|
Retirement-related
costs
|
|
|
241
|
|
|
351
|
|
(31.1)
|
|
|
|
Amortization
of acquired intangible assets
|
|
|
100
|
|
|
83
|
|
19.9
|
|
|
|
Stock-based
compensation
|
|
|
110
|
|
|
133
|
|
(17.3)
|
|
|
|
Bad
debt expense
|
|
|
30
|
|
|
16
|
|
90.8
|
|
|
|
Total
consolidated selling, general and administrative expense
|
|
$
|
5,255
|
|
$
|
5,908
|
|
(11.0)
|
%
|
|
|
Non-operating
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of acquired intangibles assets
|
|
|
(100)
|
|
|
(83)
|
|
19.9
|
|
|
|
Acquisition-related charges
|
|
|
(11)
|
|
|
(5)
|
|
144.6
|
|
|
|
Non-operating retirement-related (costs)/income
|
|
|
(89)
|
|
|
(196)
|
|
(54.3)
|
|
|
|
Operating
(non-GAAP) selling, general and administrative expense
|
|
$
|
5,055
|
|
$
|
5,625
|
|
(10.1)
|
%
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
For the nine months ended September
30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Selling,
general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative – other
|
|
$
|
14,065
|
|
$
|
14,453
|
|
(2.7)
|
%
|
|
|
Advertising
and promotional expense
|
|
|
971
|
|
|
989
|
|
(1.8)
|
|
|
|
Workforce
rebalancing charges
|
|
|
1,048
|
|
|
789
|
|
32.9
|
|
|
|
Retirement-related
costs
|
|
|
750
|
|
|
760
|
|
(1.3)
|
|
|
|
Amortization
of acquired intangible assets
|
|
|
277
|
|
|
241
|
|
14.7
|
|
|
|
Stock-based
compensation
|
|
|
324
|
|
|
370
|
|
(12.3)
|
|
|
|
Bad
debt expense
|
|
|
77
|
|
|
29
|
|
161.3
|
|
|
|
Total
consolidated selling, general and administrative expense
|
|
$
|
17,512
|
|
$
|
17,632
|
|
(0.7)
|
%
|
|
|
Non-operating
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of acquired intangibles assets
|
|
|
(277)
|
|
|
(241)
|
|
14.7
|
|
|
|
Acquisition-related charges
|
|
|
(17)
|
|
|
(17)
|
|
(0.2)
|
|
|
|
Non-operating retirement-related (costs)/income
|
|
|
(286)
|
|
|
(265)
|
|
7.8
|
|
|
|
Operating
(non-GAAP) selling, general and administrative expense
|
|
$
|
16,933
|
|
$
|
17,108
|
|
(1.0)
|
%
|
Total
Selling, general and administrative (SG&A) expense decreased 11.0 percent
(9 percent adjusted for currency) in the third quarter of 2013 versus the third
quarter of 2012. The decrease was primarily driven by lower base expense (12
points) and the effects of currency (2 points), partially offset by acquisition-related
spending (2 points). Operating (non-GAAP) SG&A expense decreased 10.1
percent (8 percent adjusted for currency) primarily driven by lower base
expense (10 points) and the effects of currency (2 points), partially offset by
acquisition-related spending (2 points). The decrease in base expense was
driven by a lower level of workforce rebalancing charges in 2013 versus 2012. In addition,
retirement-related expense declined due to a $162 million charge recorded in
the third quarter of 2012 related to a ruling regarding one of IBM UK’s defined
benefit plans.
Total SG&A expense decreased 0.7 percent (up 1 percent
adjusted for currency) in the first nine months of 2013 versus the first nine
months of 2012. The decrease was driven by lower base spending (1 point) and
the effects of currency (1 point), partially offset by higher acquisition-related
spending (2 points). Operating (non-GAAP) SG&A expense decreased 1.0
percent (flat adjusted for currency) primarily driven by the same factors. The
decrease in base expense was primarily due to lower SG&A – other expense,
partially offset by increased workforce rebalancing charges as a result of the
actions the company took in the second quarter of 2013. Bad debt expense
increased $47 million for the first nine months of 2013. The accounts
receivable provision coverage was 1.6 percent at September 30, 2013, an
increase of 20 basis points from year-end 2012.
Management Discussion –
(continued)
|
Other (income) and expense
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
|
For the three months ended September
30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
|
Other
(income) and expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency transaction losses/(gains)
|
|
$
|
256
|
|
$
|
159
|
|
61.0
|
%
|
|
|
|
(Gains)/losses
on derivative instruments
|
|
|
(284)
|
|
|
(251)
|
|
13.3
|
|
|
|
|
Interest
income
|
|
|
(13)
|
|
|
(22)
|
|
(37.4)
|
|
|
|
|
Net
(gains)/losses from securities and investment assets
|
|
|
(6)
|
|
|
(30)
|
|
(79.9)
|
|
|
|
|
Other
|
|
|
(15)
|
|
|
(463)
|
|
(96.8)
|
|
|
|
|
Total
consolidated other (income) and expense
|
|
$
|
(62)
|
|
$
|
(606)
|
|
(89.7)
|
%
|
|
|
|
Non-operating
adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related charges
|
|
|
(1)
|
|
|
(5)
|
|
(80.8)
|
|
|
|
|
Operating
(non-GAAP) other (income) and expense
|
|
$
|
(63)
|
|
$
|
(611)
|
|
(89.7)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
For the nine months ended September
30:
|
|
2013
|
|
|
2012
|
|
Change
|
|
|
Other
(income) and expense:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency transaction losses/(gains)
|
|
$
|
(238)
|
|
$
|
(18)
|
|
nm
|
%
|
|
|
(Gains)/losses
on derivative instruments
|
|
|
151
|
|
|
(156)
|
|
(196.6)
|
|
|
|
Interest
income
|
|
|
(56)
|
|
|
(83)
|
|
(33.1)
|
|
|
|
Net
(gains)/losses from securities and investment assets
|
|
|
(11)
|
|
|
(48)
|
|
(76.5)
|
|
|
|
Other
|
|
|
(59)
|
|
|
(491)
|
|
(88.0)
|
|
|
|
Total
consolidated other (income) and expense
|
|
$
|
(214)
|
|
$
|
(796)
|
|
(73.2)
|
%
|
|
|
Non-operating
adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related charges
|
|
|
(8)
|
|
|
(7)
|
|
20.0
|
|
|
|
Operating
(non-GAAP) other (income) and expense
|
|
$
|
(222)
|
|
$
|
(803)
|
|
(72.4)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm - not meaningful
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income)
and expense was income of $62 million and $606 million in the third quarter of
2013 and 2012, respectively. The decrease in income of $544 million in the third
quarter of 2013 was primarily driven by the gain associated with the
divestiture of the RSS business recorded in the third quarter of 2012 ($447
million) and higher losses from foreign currency transactions ($97 million) due
to foreign currency rate volatility year to year.
Other (income)
and expense was income of $214 million and $796 million in the first nine months
of 2013 and 2012, respectively. The decrease in income of $583 million in the
first nine months of 2013 was primarily driven by the gain associated with the
divestiture of the RSS business in the third quarter of 2012 ($447 million) and
higher losses on derivative instruments ($306 million), partially offset by
higher gains from foreign currency transactions ($220 million) due to foreign
currency rate volatility year to year.
|
|
|
|
|
|
|
|
|
|
|
|
|
Research,
Development and Engineering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
For the three months ended September
30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Total
consolidated research, development and
engineering
|
|
$
|
1,468
|
|
$
|
1,534
|
|
(4.3)
|
%
|
|
Non-operating
adjustment:
|
|
|
|
|
|
|
|
|
|
|
Non-operating retirement-related (costs)/income
|
|
|
(14)
|
|
|
5
|
|
nm
|
|
|
Operating
(non-GAAP) research, development and engineering
|
|
$
|
1,454
|
|
$
|
1,539
|
|
(5.5)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm - not meaningful
|
|
|
|
|
|
|
|
|
|
Management Discussion –
(continued)
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
For the nine months ended September
30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Total
consolidated research, development and
engineering
|
|
$
|
4,661
|
|
$
|
4,722
|
|
(1.3)
|
%
|
|
Non-operating
adjustment:
|
|
|
|
|
|
|
|
|
|
|
Non-operating retirement-related (costs)/income
|
|
|
(43)
|
|
|
14
|
|
nm
|
|
|
Operating
(non-GAAP) research, development and engineering
|
|
$
|
4,618
|
|
$
|
4,736
|
|
(2.5)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm - not meaningful
|
|
|
|
|
|
|
|
|
|
Total Research,
development and engineering (RD&E) expense decreased 4.3 percent in the third
quarter of 2013 versus the third quarter of 2012 primarily driven by: lower
base expense (7 points), partially offset by higher expense due to acquisitions
(2 points). Operating (non-GAAP) RD&E expense decreased 5.5 percent in the third
quarter of 2013 compared to the prior year, primarily driven by: lower base
expense (8 points), partially offset by higher expense due to acquisitions (2
points).
RD&E expense decreased
1.3 percent for the first nine months of 2013 versus the same period of 2012
primarily driven by: lower base expense (3 points), partially offset by
acquisitions (2 points). Operating (non-GAAP) RD&E expense decreased 2.5
percent in the first nine months of 2013 compared to the prior year primarily
driven by: lower base expense (5 points), partially offset by higher expense
due to acquisitions (2 points).
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual
Property and Custom Development Income
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
For the three months ended September
30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Intellectual
Property and Custom Development Income:
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and other transfers of intellectual property
|
|
$
|
93
|
|
$
|
107
|
|
(13.1)
|
%
|
|
|
Licensing/royalty-based
fees
|
|
|
31
|
|
|
71
|
|
(55.9)
|
|
|
|
Custom
development income
|
|
|
67
|
|
|
124
|
|
(46.2)
|
|
|
|
Total
|
|
$
|
191
|
|
$
|
303
|
|
(36.8)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
For the nine months ended September
30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Intellectual
Property and Custom Development Income:
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and other transfers of intellectual property
|
|
$
|
256
|
|
$
|
283
|
|
(9.7)
|
%
|
|
|
Licensing/royalty-based
fees
|
|
|
117
|
|
|
191
|
|
(38.8)
|
|
|
|
Custom
development income
|
|
|
249
|
|
|
373
|
|
(33.3)
|
|
|
|
Total
|
|
$
|
621
|
|
$
|
847
|
|
(26.7)
|
%
|
The
timing and amount of Sales and other transfers of IP may vary significantly
from period to period depending upon the timing of divestitures, economic
conditions, industry consolidation and the timing of new patents and know-how
development. There were no significant IP transactions in the third quarter and
first nine months of 2013 and 2012.
Interest
Expense
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
|
For the three months ended September 30:
|
|
|
2013
|
|
2012
|
|
Change
|
|
|
|
Interest
expense
|
|
$
|
97
|
|
$
|
124
|
|
(21.5)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Interest
expense
|
|
$
|
289
|
|
$
|
350
|
|
|
(17.5)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Discussion –
(continued)
The decrease in interest expense for the third quarter and
first nine months of 2013 versus the same periods of 2012 was primarily driven
lower average interest rates, partially offset by higher average debt levels.
Interest expense is presented in cost of financing in the Consolidated
Statement of Earnings only if the related external borrowings are to support
the Global Financing external business. See page 79 for additional information
regarding Global Financing debt and interest expense. Overall interest expense
(excluding capitalized interest) for the third quarter and first nine months of
2013 was $242 million and $733 million, respectively, a decrease of $18 million
and $27 million, respectively, year to year.
Retirement-Related
Plans
The following table provides the total pre-tax cost
for all retirement-related plans. These amounts are included in the
Consolidated Statement of Earnings within the caption (e.g., Cost, SG&A,
RD&E) relating to the job function of the plan participants.
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Retirement-related
plans – cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
135
|
|
$
|
120
|
|
|
12.4
|
%
|
|
|
Amortization
of prior service cost/(credits)
|
|
|
(28)
|
|
|
(37)
|
|
|
(24.5)
|
|
|
|
Cost
of defined contribution plans
|
|
|
341
|
|
|
357
|
|
|
(4.6)
|
|
|
|
Total
operating costs
|
|
$
|
447
|
|
$
|
440
|
|
|
1.7
|
%
|
|
|
Interest
cost
|
|
$
|
929
|
|
$
|
1,053
|
|
|
(11.7)
|
%
|
|
|
Expected
return on plan assets
|
|
|
(1,543)
|
|
|
(1,583)
|
|
|
(2.5)
|
|
|
|
Recognized
actuarial losses
|
|
|
855
|
|
|
600
|
|
|
42.6
|
|
|
|
Plan
amendments/curtailments/settlements
|
|
|
0
|
|
|
(0)
|
|
|
nm
|
|
|
|
Multi-employer
plan/other costs
|
|
|
16
|
|
|
188
|
|
|
(91.4)
|
|
|
|
Total
non-operating costs/(income)
|
|
$
|
257
|
|
$
|
258
|
|
|
(0.2)
|
%
|
|
|
Total
retirement-related plans – cost
|
|
$
|
705
|
|
$
|
698
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm – not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
Percent
|
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
|
Retirement-related
plans – cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
408
|
|
$
|
367
|
|
|
11.4
|
%
|
|
|
|
Amortization
of prior service cost/(credits)
|
|
|
(86)
|
|
|
(112)
|
|
|
(22.8)
|
|
|
|
|
Cost
of defined contribution plans
|
|
|
1,040
|
|
|
1,152
|
|
|
(9.8)
|
|
|
|
|
Total
operating costs
|
|
$
|
1,362
|
|
$
|
1,407
|
|
|
(3.2)
|
%
|
|
|
|
Interest
cost
|
|
$
|
2,791
|
|
$
|
3,177
|
|
|
(12.2)
|
%
|
|
|
|
Expected
return on plan assets
|
|
|
(4,630)
|
|
|
(4,763)
|
|
|
(2.8)
|
|
|
|
|
Recognized
actuarial losses
|
|
|
2,571
|
|
|
1,805
|
|
|
42.4
|
|
|
|
|
Plan
amendments/curtailments/settlements
|
|
|
0
|
|
|
1
|
|
|
nm
|
|
|
|
|
Multi-employer
plan/other costs
|
|
|
71
|
|
|
234
|
|
|
(69.5)
|
|
|
|
|
Total
non-operating costs/(income)
|
|
$
|
803
|
|
$
|
454
|
|
|
76.8
|
%
|
|
|
|
Total
retirement-related plans – cost
|
|
$
|
2,165
|
|
$
|
1,862
|
|
|
16.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm – not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the third quarter, total retirement-related plans
cost increased by $7 million compared to the third quarter of 2012, primarily
driven by an increase in recognized actuarial losses ($255 million) and lower
expected return on plan assets ($39 million), partially offset by the UK
pension litigation charge ($162 million) recorded in the third quarter of 2012
and lower interest cost ($124 million). Total cost for the first nine months of
2013 increased $303 million versus the first nine months of 2012, primarily
driven by an increase in recognized actuarial losses ($766 million) and lower
expected return on plan assets
Management Discussion –
(continued)
($133 million),
partially offset by lower interest cost ($387 million), lower pension
litigation cost ($162 million) and lower defined contribution plans cost ($113
million).
As discussed in the “Snapshot” on page 42, the
company characterizes certain retirement-related costs as operating and others
as non-operating. Utilizing this characterization, operating retirement-related
costs in the third quarter were $447 million, an increase of $8 million
compared to the third quarter of 2012, primarily driven by higher service cost
($15 million) and decreased amortization of prior service cost credits ($9
million), partially offset by lower defined contribution plans cost ($16
million). Non-operating costs of $257 million decreased $1 million in the third
quarter compared to the prior year driven primarily by an increase in
recognized actuarial losses ($255 million) and lower expected return on plan
assets ($39 million), partially offset by lower pension litigation cost ($162
million) and lower interest cost ($124 million). For the first nine months of
2013, operating retirement-related costs were $1,362 million, a decrease of $46
million compared to the first nine months of 2012. This decrease was driven by
lower defined contribution plans cost ($113 million), partially offset by
higher service cost ($42 million) and decreased amortization of prior service
cost credits ($25 million). Non-operating costs of $803 million increased $349
million in the first nine months compared to the prior year driven primarily by
an increase in recognized actuarial losses ($766 million) and lower expected
return on plan assets ($133 million), partially offset by lower interest cost
($387 million) and lower pension litigation cost ($162 million).
See Note 8, "Retirement-Related Benefits,"
on pages 32 to 34 for additional plan cost detail.
Taxes
The
effective tax rate for the third quarter of 2013 was 16.0 percent compared to
an effective tax rate of 24.6 percent for the third quarter of 2012. The
effective tax rates for the nine months of 2013 and 2012 were 18.0 percent and
23.5 percent, respectively. The operating (non-GAAP) tax rate for the third
quarter of 2013 was 17.0 percent compared to 24.7 percent for the third quarter
of 2012. The operating (non-GAAP) tax rate for the first nine months of 2013
was 18.7 percent compared to 23.7 percent for the first nine months of 2012.
The decline in the third quarter tax rate compared
to the prior year was primarily due to a decrease in the full year expected tax
rate resulting from a more favorable expected geographic mix of earnings, as
well as one time discrete benefits primarily due to foreign tax audit activity which
concluded in the quarter (approximately $148 million) and the third-quarter
2012 tax charge related to the RSS divestiture gain (approximately $58
million).
The decrease in the tax rate for the first nine
months of 2013 compared to the prior year was driven by: the third-quarter impacts
described above; a favorable tax agreement received in the second quarter of
2013 which required a reassessment of certain valuation allowances on deferred
tax assets (approximately $288 million); the benefits reflected in the first
quarter of 2013 related to the retroactive impact of the 2012 American Taxpayer
Relief Act (approximately $135 million); and newly enacted state legislation
(approximately $125 million); partially offset by a tax charge related to
intercompany licensing of certain intellectual property (approximately $177
million). The rate for the first nine months of 2012 reflected a one-time
benefit associated with a tax restructuring in Latin America (approximately
$165 million) as well as the tax impact related to the RSS divestiture gain.
With limited exception, the company is no longer
subject to U.S. federal, state and local or non-U.S. income tax audits by
taxing authorities for years through 2007. The years subsequent to 2007 contain
matters that could be subject to differing interpretations of applicable tax
laws and regulations as it relates to the amount and/or timing of income,
deductions and tax credits. Although the outcome of tax audits is always uncertain,
the company believes that adequate amounts of tax and interest have been
provided for any adjustments that are expected to result for these years.
The amount of unrecognized tax benefits at December 31,
2012 increased $33 million in the third quarter of 2013 and decreased $1
million in the first nine months of 2013 to $5,671 million. The total amount of
unrecognized tax benefits that, if recognized, would favorably affect the
effective tax rate was $5,081 million at September 30, 2013.
In April 2010, the company appealed the determination of a
non-U.S. local taxing authority with respect to certain foreign tax losses. The
tax benefit of these losses, approximately $1,221 million, has been included in
unrecognized tax benefits. This amount includes the portion of these losses
that had been utilized against a prior year liability. In April 2011, the
company received notification that the appeal had been denied. In June 2011,
the company filed a lawsuit challenging this decision. The company’s latest
brief was filed in September 2013, with the next court hearing scheduled for December
2013.
At September 30, 2013, the company has recorded $394
million as prepaid income taxes in India. A significant portion of this balance
represents cash tax deposits paid over time to protect the company’s right to
appeal various income tax
Management Discussion –
(continued)
assessments made by the
Indian tax authorities. The company believes it will prevail on these matters
and that this amount is not a meaningful indicator of liability.
In the fourth quarter of
2011, the IRS commenced its audit of the company’s U.S. tax returns for 2008
through 2010. The company anticipates that this audit will be completed by the
end of 2013.
Earnings Per Share
Basic earnings per share is computed on the basis of
the weighted-average number of shares of common stock outstanding during the
period. Diluted earnings per share is computed on the basis of the
weighted-average number of shares of common stock outstanding plus the effect
of dilutive potential common shares outstanding during the period using the
treasury stock method. Dilutive potential common shares include outstanding
stock options and stock awards.
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
For the three months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Earnings
per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming
dilution
|
|
$
|
3.68
|
|
$
|
3.33
|
|
|
10.5
|
%
|
|
|
Basic
|
|
$
|
3.70
|
|
$
|
3.36
|
|
|
10.1
|
%
|
|
|
Diluted
operating (non-GAAP)
|
|
$
|
3.99
|
|
$
|
3.62
|
|
|
10.2
|
%
|
|
Weighted-average
shares outstanding: (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming
dilution
|
|
|
1,098.8
|
|
|
1,149.3
|
|
|
(4.4)
|
%
|
|
|
Basic
|
|
|
1,090.9
|
|
|
1,137.2
|
|
|
(4.1)
|
%
|
|
|
|
|
|
|
|
|
|
|
Yr. to Yr.
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
Change
|
|
|
Earnings
per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming
dilution
|
|
$
|
9.27
|
|
$
|
9.27
|
|
|
0.0
|
%
|
|
|
Basic
|
|
$
|
9.35
|
|
$
|
9.38
|
|
|
(0.3)
|
%
|
|
|
Diluted
operating (non-GAAP)
|
|
$
|
10.21
|
|
$
|
9.90
|
|
|
3.1
|
%
|
|
Weighted-average
shares outstanding: (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming
dilution
|
|
|
1,110.7
|
|
|
1,161.8
|
|
|
(4.4)
|
%
|
|
|
Basic
|
|
|
1,101.8
|
|
|
1,148.4
|
|
|
(4.1)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
shares outstanding at September 30, 2013 were 1,085.9 million. The
weighted-average number of common shares outstanding assuming dilution during
the third quarter and first nine months of 2013 was 50.5 million and 51.1
million shares lower, respectively, than the same periods in 2012, primarily as
a result of the company’s common stock repurchase program.
Financial Position
Dynamics
At September 30, 2013, the company continues to have
a high degree of financial flexibility with a strong balance sheet to support
its business objectives. Cash and marketable securities at quarter end were
$10,232 million. Total debt of $36,180 million increased $2,911 million from
prior year-end levels. The company continues to have substantial flexibility in
the market. In the first nine months of 2013, the company generated $10,957
million in cash from operations, a decrease of $2,283 million compared to the
first nine months of 2012. The company has consistently generated strong cash
flow from operations and continues to have access to additional sources of
liquidity through the capital markets and its $10 billion global credit
facility. The company’s cash flow and substantial cash position permits the
company to invest and deploy capital to areas with the most attractive
long-term opportunities.
The assets and debt associated with the Global
Financing business are a significant part of the company’s financial
position. The financial position amounts appearing on pages 5 and 6 are
the consolidated amounts including Global Financing. The amounts appearing in
the separate Global Financing section, beginning on page 75, are supplementary
data presented to facilitate an understanding of the Global Financing business.
Management Discussion –
(continued)
|
Working
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
At December 31,
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
Current
assets
|
|
$
|
47,533
|
|
$
|
49,433
|
|
Current
liabilities
|
|
|
39,222
|
|
|
43,625
|
|
Working
capital
|
|
$
|
8,311
|
|
$
|
5,807
|
|
|
|
|
|
|
|
|
|
Current
ratio
|
|
|
1.21:1
|
|
|
1.13:1
|
Working capital
increased $2,504 million from the year-end 2012 position. The key changes are
described below:
Current assets decreased
$1,900 million (a decrease of $1,188 million adjusted for currency), due to:
·
A decline of $2,243 million
($1,748 million adjusted for currency) in short-term receivables primarily due
to collections of higher year-end balances; and
·
A decrease in cash and cash
equivalents and marketable securities of $897 million; offset by
·
An increase of $698 million ($826
million adjusted for currency) in various prepaid expenses and other assets,
primarily driven by taxes ($409 million).
Current liabilities
decreased $4,404 million ($3,807 million adjusted for currency), as a result
of:
·
A decrease in accounts payable of
$1,689 million ($1,616 million adjusted for currency) reflecting declines from
typically higher year-end balances;
·
A decrease in short term debt of
$1,479 million ($1,303 million adjusted for currency) (see debt analysis on
page 70);
·
A decrease of $536 million ($468
million adjusted for currency) in compensation and benefits primarily driven by
2012 employee bonus payments in March (approximately $1 billion), partially
offset by the U.S. 401 (k) company match (approximately $0.5 billion) which
will not be paid until the fourth quarter; and
·
A decrease in deferred income of
$295 million ($104 million adjusted for currency) primarily driven by Software
arrangements.
Cash Flow
The company’s cash flow from operating, investing
and financing activities, as reflected in the Consolidated Statement of Cash
Flows on page 7, is summarized in the table below. These amounts include
the cash flows associated with the Global Financing business.
|
(Dollars in millions)
|
|
|
|
|
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
Net
cash provided by/(used in):
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
10,957
|
|
$
|
13,240
|
|
Investing activities
|
|
|
(4,423)
|
|
|
(4,912)
|
|
Financing activities
|
|
|
(6,870)
|
|
|
(8,185)
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(4)
|
|
|
(156)
|
|
Net
change in cash and cash equivalents
|
|
$
|
(340)
|
|
$
|
(13)
|
Management Discussion –
(continued)
Net cash from operating activities decreased by
$2,283 million as compared to the nine months of 2012 driven by the following
factors:
· Decreased net income of $472 million;
· An increase in the use of cash of $497
million related to the fulfillment of services contracts;
· An increase in cash payments for workforce
rebalancing of $402 million;
· Increase in cash income tax payments of
$384 million;
· A decrease in cash provided by accounts
receivable of $376 million driven by lower collections; and
·
Net decreases from
compensation and benefit accruals/payments of $75 million (includes a savings
of $527 million from the deferral of the U.S. 401(k) company match).
Net cash used in
investing activities decreased $489 million driven by:
·
An increase in cash of $942
million from net sales of marketable securities and other investments; and
·
A net decrease of $617 million in
cash used for capital expenditures, partially offset by
·
A net increase of $635 million in
cash used for acquisitions/divestitures; and
·
A net decrease in cash provided by
non-operating financing receivables of $434 million.
Net cash used in
financing activities decreased $1,315 million as compared to the first nine
months of 2012 driven by the following factors:
·
An increase in net cash from debt
transactions (including short-term borrowings) of $979 million; and,
·
A decrease of $554 million of net
cash used for common stock transactions; partially offset by,
·
An increase in dividend payments
of $217 million.
|
Noncurrent
Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
At December 31,
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
Noncurrent
assets
|
|
$
|
70,312
|
|
$
|
69,780
|
|
Long-term
debt
|
|
|
28,478
|
|
|
24,088
|
|
Noncurrent
liabilities (excluding debt)
|
|
|
30,137
|
|
|
32,516
|
The increase in
noncurrent assets of $531 million (a decrease of $1,522 million adjusted for
currency) was driven by:
·
An increase in intangible assets
and goodwill of $1,851 million ($2,062 million adjusted for currency) primarily
driven by acquisitions; partially offset by,
·
A decrease of $1,137 million in
financing receivables ($824 million adjusted for currency) reflecting typical
reductions from higher year-end balances, and
·
A decrease in investment and
sundry assets of $303 million (an increase of $161 million adjusted for
currency) driven by declines in derivatives.
Long-term debt increased
by $4,390 million ($4,447 million adjusted for currency) primarily driven by
new debt issuances of $7,123 million, partially offset by reclasses to
short-term debt of $2,531 million.
Management Discussion –
(continued)
Other noncurrent liabilities, excluding debt, decreased $2,379 million ($1,961
million adjusted for currency) primarily driven by a decrease in retirement and
nonpension benefit obligations of $2,424 million ($2,184 million adjusted for
currency).
Debt
The company’s funding requirements are continually
monitored and strategies are executed to manage the overall asset and liability
profile. Additionally, the company maintains sufficient flexibility to access
global funding sources as needed.
|
|
|
At September 30,
|
|
At December 31,
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
Total
company debt
|
|
$
|
36,180
|
|
$
|
33,269
|
|
Total
Global Financing segment debt
|
|
$
|
25,824
|
|
$
|
24,501
|
|
Debt to support external clients
|
|
|
22,755
|
|
|
21,583
|
|
Debt to support internal clients
|
|
|
3,068
|
|
|
2,919
|
Global Financing provides financing predominantly
for the company’s external client assets, as well as for assets under contract
by other IBM units. These assets, primarily for Global Services, generate
long-term, stable revenue streams similar to the Global Financing asset
portfolio. Based on their attributes, these Global Services assets are
leveraged with the balance of the Global Financing asset base. The debt
analysis above is further detailed in the Global Financing section on page 79.
Given the significant leverage, the company presents
a debt-to-capitalization ratio which excludes Global Financing debt and equity
as management believes this is more representative of the company’s core
business operations. This ratio can vary from period to period as the company
manages its global cash and debt positions.
“Core” debt-to-capitalization ratio (excluding
Global Financing debt and equity) was 38.7 percent at September 30, 2013
compared to 36.1 percent at December 31, 2012. The increase was primarily
driven by an increase in non-Global Financing debt of $1,588 million partially
offset by an increase in non-Global Financing equity of $887 million from
December 31, 2012 balances. “Core” debt-to-capitalization ratio (excluding
Global Financing debt and equity) increased 2.7 points compared to September
30, 2012.
Consolidated debt-to-capitalization ratio at
September 30, 2013 was 64.4 percent versus 63.7 percent at December 31, 2012,
and 60.8 percent at September 30, 2012.
Equity
Total equity increased by $1,024 million from
December 31, 2012 as a result of an increase in retained earnings of $7,244
million, an increase in common stock of $1,094 million and lower accumulated
other comprehensive loss of $788 million, partially offset by an increase in
treasury stock of $8,109 million related to gross common stock repurchases in
the first nine months of 2013.
Looking Forward
The company measures the success of its
business model over the long term, not any individual quarter or year. The
company’s strategies, investments and actions are all taken with an objective
of optimizing long-term performance.
In
May 2010, the company met with investors and introduced a road map for
earnings per share in 2015. The objective of the road map for growth is to
achieve at least $20 of operating (non-GAAP) earnings per diluted share in
2015. The company has identified the major drivers of financial performance:
revenue growth, margin expansion and common stock share repurchase. The revenue
growth will come from a combination of base revenue growth, a shift to faster
growing businesses and from acquisitions closed between 2010 and 2015. The
contribution from margin expansion will be driven by the mix of higher margin
businesses and enterprise productivity. The company will also continue to
return value to its shareholders, with approximately $50 billion of gross share
repurchases and $20 billion of dividends expected during the road map period.
In the
third quarter, the company delivered 10 percent growth in earnings per share
through the combination of continued momentum in key growth areas, a better
business mix, yield from productivity initiatives, reductions in spending and
performance-related compensation, discrete tax benefits and an effective use of
cash while managing a couple of substantial
Management Discussion –
(continued)
headwinds
- absorbing a significant impact from currency and the impact of the pause
during the development of China’s new economic plans.
In the
growth markets, the company will be dealing with the China impact for another
couple of quarters. The company is taking management actions to improve
execution, and expects to improve its performance in the growth markets in the
fourth quarter of 2013, driving to mid-single digit revenue performance at
constant currency in 2014. The company also expects continued strong
performance in its growth initiatives – Smarter Planet, business analytics and
cloud. These initiatives not only address key market trends, they drive a
higher mix of software content which results in a higher margin. The company
expects to continue its transformation over the longer term to a higher margin
annuity base and an even stronger business profile. With this improved
operational performance, continued momentum in the growth initiatives and the
flexibility in the financial model, in October 2013, the company stated that it
expects full-year 2013 GAAP diluted earnings per share at least $15.01, and
maintained its expectation for at least $16.25 in operating (non-GAAP) diluted
earnings per share for the full year 2013 on an “all in basis”, or at least
$16.90, excluding the second quarter workforce rebalancing charge of $1.0
billion. Any gain received in 2013 from the
transaction with SYNNEX to divest the company’s worldwide customer care
business process outsourcing services business will be incremental to the
company’s “all in” guidance of at least $16.25 of operating (non-GAAP) diluted
earnings per share. The gain received in 2014 will be addressed by the company
in its expectations for 2014 operating (non-GAAP) diluted earnings per share
which will be provided in January 2014. In
addition, the company believes that with the actions that it is executing, it
will have stronger operational performance going into 2014. The company also
remains confident in its ability to achieve at least $20 of operating
(non-GAAP) earnings per share in 2015.
From a
segment perspective, in the third quarter, the Software business delivered
revenue growth of 2 percent at constant currency, driven by key branded
middleware which increased 4 percent adjusted for currency, and held share.
Historically, the third quarter has been more difficult for the Software business.
Looking forward to the fourth quarter, the Software business has a strong
opportunity pipeline, and the company expects improvement in revenue growth,
driven by mid-single digit constant currency growth in key branded middleware,
and double digit growth in profit in the quarter. The Global Services business
returned to revenue growth at constant currency in the third quarter and
delivered double digit profit growth with expanded profit margins. Both GTS and
GBS improved their revenue performance from the second quarter. In addition,
the business enters the fourth quarter with solid backlog growth in the third
quarter. In the fourth quarter, the company expects the Global Services
business to again deliver double digit profit growth, driven by an expected 7
percent constant currency revenue growth in GBS. The Systems and Technology
business had a difficult third quarter. The growth markets performance drove
two-thirds of the revenue decline, approximately half of which was in China. This impacted all the hardware brands. The company has taken actions to improve its
performance in the growth markets as discussed above.
Currency movements impacted the company’s year to year revenue and earnings per
share growth in the first nine months of 2013. Revenue growth in the third
quarter and the first nine months was impacted by 2.5 points and 2.1 points,
respectively, from currency. Currency also impacted the company’s profit performance.
While there have been a number of currency movements year to year, the
company’s results continue to be significantly impacted by the depreciation of
the Yen. Due to the fact that the company’s business in Japan is more heavily skewed to local services, the company has less ability to hedge cross border
cash flows in Japan as compared to most other countries. As a result, the
currency impact related to the Yen largely falls to profit. The year to year
impact was more significant in the third quarter, and would continue, at
current spot rates, through the first quarter of 2014.
The company’s
effective tax rates for the third quarter and first nine months of 2013
benefitted from the recognition of discrete period tax events. The company
expects in the normal course of business that its effective tax rate and
operating (non-GAAP) tax rate, before the impact of any discrete items, will be
approximately 23 percent for the full year 2013 and through 2014. Looking
forward, the company is involved in a number of tax audits and disputes
worldwide, including the 2008 through 2010 U.S Federal audit. The company
expects to conclude some of these audits and disputes in the fourth quarter of
2013 which could result in a favorable settlement in that period. The rate will
change year to year based on non-recurring events, such as the settlement of income
tax audits and changes in tax laws, as well as recurring factors including the
geographic mix of income before taxes, the timing and amount of foreign
dividend repatriation, state and local taxes and the effects of various global
income tax strategies.
The
company’s free cash flow performance in the first nine months of 2013 compared
to the prior year was impacted by operational performance, changes in sales
cycle working capital, higher workforce rebalancing payments and cash tax
payments. This year to year impact related to cash tax payments, which was
approximately $400 million in the first nine months, is expected to be
approximately $1.1 billion for the full year 2013. As a result of this impact
and the other drivers, the company does not expect free cash flow to increase
year to year compared to the full year 2012. In 2014, the company
Management Discussion –
(continued)
expects free cash flow, excluding the impact of cash tax
payments, to grow at a rate of approximately 15-20 percent. The company expects
free cash flow in 2014 to increase by approximately $1 billion year to year,
including the impacts of cash tax payments, and grow faster than net income.
Cash tax payments are expected to be a headwind in 2014 of approximately $2
billion. In 2015, the company expects that free cash flow, including cash tax
payments, to grow at approximately 15-20 percent, again growing faster than net
income. It is expected that cash tax payments will be a tailwind in 2015.
In its
2015 roadmap, the company indicated that it expected to spend approximately $90
billion between gross share repurchases, dividends and acquisitions; the $90
billion is approximately $85-86 billion on a net basis. The company’s
expectation for free cash flow across the roadmap is also in the range of $85
billion. Therefore, over the roadmap, these two elements are in relative
balance, and that does not include any cash inflows the company would receive
from potential divestitures. On that basis, even though the company has had
disappointing free cash flow performance in 2013, the company still expects the
overall free cash flow construct in the 2015 roadmap to be able to support the
original objectives for expenditures. There is fungibility across the elements
of share repurchase, dividends and acquisitions. This has been evident in the
first two plus years of the 2015 roadmap; more expenditures related to share
repurchase, slightly less related to acquisitions. The company does not expect
either the category or cadence of these expenditures to be linear through the
roadmap; however, the company believes that the aggregate view is still very
relevant as a guide for the company’s usage of free cash flow.
The
company expects 2013 pre-tax retirement-related plan cost to be approximately
$2.9 billion, an increase of approximately $500 million compared to 2012. This
estimate reflects current pension plan assumptions at December 31, 2012,
and excludes any potential impacts from retirement-related plan litigation.
Within total retirement-related plan cost, operating retirement-related plan
cost is expected to be approximately $1.8 billion, essentially flat versus
2012. Non-operating retirement-related plan cost is expected to be
approximately $1.1 billion, an increase of approximately $600 million, compared
to 2012.
Currency Rate Fluctuations
Changes in the relative values of non-U.S.
currencies to the U.S. dollar affect the company’s financial results and
financial position. At September 30, 2013, currency changes resulted in assets
and liabilities denominated in local currencies being translated into fewer
dollars than at year-end 2012. The company uses financial hedging instruments
to limit specific currency risks related to financing transactions and other
foreign currency-based transactions. Further discussion of currency and hedging
appears in the company’s 2012 Annual Report in Note D, “Financial Instruments,”
on pages 94 to 98.
Foreign currency fluctuations
often drive operational responses that mitigate the simple mechanical
translation of earnings. During periods of sustained movements in currency, the
marketplace and competition adjust to the changing rates. For example, when
pricing offerings in the marketplace, the company may use some of the advantage
from a weakening U.S. dollar to improve its position competitively, and price
more aggressively to win the business, essentially passing on a portion of the
currency advantage to its customers. Competition will frequently take the same
action. Consequently, the company believes that some of the currency-based
changes in cost impact the prices charged to clients. The company also
maintains currency hedging programs for cash management purposes which
mitigate, but do not eliminate, the volatility of currency impacts on the
company’s financial results.
The company translates revenue, cost and expense in its non-U.S.
operations at current exchange rates in the reported period. References to “adjusted
for currency” or “constant currency” reflect adjustments based upon a simple
constant currency mathematical translation of local currency results using the
comparable prior period’s currency conversion rate. However, this constant
currency methodology that the company utilizes to disclose this information
does not incorporate any operational actions that management may take in
reaction to fluctuating currency rates. Currency movements, particularly
the depreciation of the Yen, impacted the company’s year-to-year revenue and
earnings per share growth in the first nine months of 2013. Based on the
currency rate movements in the first nine months of 2013, total revenue
decreased 4.2 percent as reported and decreased 2.1 percent at constant
currency versus the first nine months of 2012. On a pre-tax income basis, these
translation impacts offset by the net impact of hedging activities resulted in
a theoretical maximum (assuming no pricing or sourcing actions) decrease of
approximately $290 million in the first nine months of 2013. The same
mathematical exercise resulted in a decrease of approximately $55 million in
the first nine months of 2012. The company views these amounts as a theoretical
maximum impact to its as-reported financial results. Considering the
operational responses mentioned above, movements of exchange rates, and the
nature and timing of hedging instruments, it is difficult to predict future
currency impacts on any particular period, but the company believes it could be
substantially less than the theoretical maximum
given the competitive pressure in the marketplace.
Management Discussion –
(continued)
For non-U.S. subsidiaries and branches that operate
in U.S. dollars or whose economic environment is highly inflationary, translation
adjustments are reflected in results of operations. Generally, the company
manages currency risk in these entities by linking prices and contracts to U.S.
dollars. The company continues to monitor the economic conditions in Venezuela. On December 30, 2010, the official rate for essential goods was eliminated,
with no change to the SITME rate. The SITME rate remained constant throughout
2012 and 2011. In February 2013, the SITME rate was eliminated, and the
official rate was set at 6.3 bolivars fuerte (BsF) to the U.S. dollar. This
devaluation did not have a material impact given the size of the company’s
operations in Venezuela (less than 1 percent of total 2011 and 2012 revenue,
respectively).
Liquidity and Capital Resources
In the company’s 2012 Annual Report, on pages 56 to 58,
there is a discussion of the company’s liquidity including two tables that
present five years of data. The table presented on page 56 includes net
cash from operating activities, cash and marketable securities and the size of
the company’s global credit facilities for each of the past five years. For the
nine months ended, or as of, as applicable, September 30, 2013, those amounts
are $11.0 billion for net cash from operating activities, $10.2 billion of cash
and marketable securities and $10 billion in global credit facilities,
respectively. The term of the five-year global credit facility has been
extended by one year, and now expires on November 10, 2018. See the 2012 Annual
Report on page 105 for additional information.
The major rating agencies’ ratings on the company’s
debt securities at September 30, 2013 appear in the table below. The agency
ratings remain unchanged from December 31, 2012. The company’s debt securities
do not contain any self-executing acceleration clauses which could automatically
change the scheduled maturities of the obligation. In addition, the company
does not have “ratings trigger” provisions in its debt covenants or
documentation, which would allow the holders to declare an event of default and
seek to accelerate payments thereunder in the event of a change in credit
rating. The company’s contractual agreements governing derivative instruments
contain standard market clauses which can trigger the termination of the
agreement if the company’s credit rating were to fall below investment grade.
At September 30, 2013, the fair value of those instruments that were in a liability
position was $581 million, before any applicable netting, and this position is
subject to fluctuations in fair value period to period based on the level of
the company’s outstanding instruments and market conditions. The company has no
other contractual arrangements that, in the event of a change in credit rating,
would result in a material adverse effect on its financial position or liquidity.
|
|
|
STANDARD
|
|
MOODY'S
|
|
|
|
|
|
AND
|
|
INVESTORS
|
|
FITCH
|
|
|
|
POOR'S
|
|
SERVICE
|
|
RATINGS
|
|
Senior
long-term debt
|
|
AA-
|
|
Aa3
|
|
A+
|
|
Commercial
paper
|
|
A-1+
|
|
Prime-1
|
|
F1
|
The table appearing on page 57 of the company’s
2012 Annual Report presents the format in which management reviews cash flows
for each of the past five years and is accompanied by a description of the way
cash flow is managed, measured and reviewed. The company prepares its
Consolidated Statement of Cash Flows in accordance with applicable accounting
standards for cash flow presentation on page 7 of this Form 10-Q and
highlights causes and events underlying sources and uses of cash in that format
on pages 68 and 69. The following is management’s view of cash flows for the
first nine months of 2013 and 2012 prepared in a manner consistent with the
table and description on pages 56 and 57 of the company’s 2012 Annual
Report:
Management Discussion –
(continued)
|
(Dollars in millions)
|
|
|
|
|
|
|
|
For the nine months ended September 30:
|
|
2013
|
|
2012
|
|
Net
cash from operating activities per GAAP:
|
|
$
|
10,957
|
|
$
|
13,240
|
|
Less:
the change in Global Financing receivables
|
|
|
1,628
|
|
|
1,245
|
|
Net
cash from operating activities, excluding Global Financing receivables
|
|
|
9,329
|
|
|
11,995
|
|
Capital expenditures, net
|
|
|
(2,709)
|
|
|
(3,326)
|
|
Free
cash flow
|
|
|
6,620
|
|
|
8,670
|
|
Acquisitions
|
|
|
(2,562)
|
|
|
(2,266)
|
|
Divestitures
|
|
|
247
|
|
|
587
|
|
Share repurchase
|
|
|
(8,062)
|
|
|
(8,988)
|
|
Dividends
|
|
|
(3,033)
|
|
|
(2,816)
|
|
Non-Global Financing debt
|
|
|
1,556
|
|
|
2,284
|
|
Other (includes Global Financing receivables and Global Financing debt)
|
|
|
4,337
|
|
|
2,861
|
|
Change
in cash, cash equivalents and short-term marketable securities
|
|
$
|
(897)
|
|
$
|
331
|
Free
cash flow for the first nine months of 2013 decreased $2,049 million versus the
first nine months of 2012. The decrease was driven changes in sales cycle
working capital, higher workforce rebalancing payments, increased cash tax
payments and a decline in operational net income, partially offset by lower
capital expenditures and a benefit associated with the timing of the company’s
funding of its 401(k) Plus Plan. Also, in the first nine months of 2013, $11.1
billion was returned to shareholders through gross share repurchases and
dividends.
Events that could temporarily
change the historical cash flow dynamics discussed above and in the company’s
2012 Annual Report include significant changes in operating results, material
changes in geographic sources of cash, unexpected adverse impacts from
litigation or future pension funding during periods of severe downturn in the
capital markets or the timing of tax payments. Whether any litigation has such
an adverse impact will depend on a number of variables, which are more
completely described in Note 12, “Contingencies,” on pages 38 to 40 of
this Form 10-Q. With respect to pension funding, the company expects to
make legally mandated pension plan contributions to certain non-U.S. plans of
approximately $500 million in 2013. Financial market performance and/or further
weakening in the European sovereign debt credit environment in 2013 could
increase the legally mandated minimum contributions in certain non-U.S.
countries that require more frequent remeasurement of the funded status. The
company is not quantifying any further impact from pension funding because it
is not possible to predict future movements in the capital markets or pension
plan funding regulations.
The company’s U.S. cash flows continue to be sufficient to fund
its current domestic operations and obligations, including investing and
financing activities such as dividends and debt service. The company’s U.S. operations generate substantial cash flows, and, in those circumstances where the company has
additional cash requirements in the U.S., the company has several liquidity
options available. These options may include the ability to borrow additional
funds at reasonable interest rates, utilizing its committed global credit
facility, repatriating certain foreign earnings and utilizing intercompany
loans with certain foreign subsidiaries.
The company does earn a significant amount
of its pre-tax income outside the U.S. The company’s policy is to indefinitely
reinvest the undistributed earnings of its foreign subsidiaries, and
accordingly, no provision for federal income taxes has been made on accumulated
earnings of foreign subsidiaries. The company periodically repatriates a
portion of these earnings to the extent that it does not incur an additional
U.S tax liability. Quantification of the deferred tax liability, if any,
associated with indefinitely reinvested earnings is not practicable. While the
company currently does not have a need to repatriate funds held by its foreign
subsidiaries, if these funds are needed for operations and obligations in the
U.S., the company could elect to repatriate these funds which could result in a
reassessment of the company’s policy and increased tax expense.
Management Discussion –
(continued)
Global Financing
Global Financing is a reportable segment that is
measured as a stand-alone entity. Global Financing facilitates clients’
acquisition of IBM systems, software and services with the objective of
generating consistently strong returns on equity.
Results of
Operations
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
(Dollars in millions)
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
External
revenue
|
|
$
|
502
|
|
|
$
|
472
|
|
|
$
|
1,488
|
|
|
$
|
1,478
|
|
|
Internal
revenue
|
|
|
512
|
|
|
|
491
|
|
|
|
1,628
|
|
|
|
1,492
|
|
|
Total
revenue
|
|
|
1,015
|
|
|
|
963
|
|
|
|
3,116
|
|
|
|
2,970
|
|
|
Cost
|
|
|
361
|
|
|
|
322
|
|
|
|
1,026
|
|
|
|
980
|
|
|
Gross
profit
|
|
$
|
653
|
|
|
$
|
642
|
|
|
$
|
2,090
|
|
|
$
|
1,990
|
|
|
Gross
profit margin
|
|
|
64.4
|
%
|
|
|
66.6
|
%
|
|
|
67.1
|
%
|
|
|
67.0
|
%
|
|
Pre-tax
income
|
|
$
|
494
|
|
|
$
|
476
|
|
|
$
|
1,582
|
|
|
$
|
1,516
|
|
|
After-tax
income*
|
|
$
|
333
|
|
|
$
|
319
|
|
|
$
|
1,066
|
|
|
$
|
1,016
|
|
|
Return
on equity*
|
|
|
37.6
|
%
|
|
|
39.3
|
%
|
|
|
40.3
|
%
|
|
|
41.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* See page 80 for the details of the after-tax income and
the return on equity calculation.
|
|
The increase in revenue
in the third quarter, as compared to the same period in 2012, was due to:
·
Growth in external revenue of 6.5
percent (9 percent adjusted for currency), due to increases in used equipment
sales revenue (up 14.5 percent to $130 million) and in financing revenue (up
3.9 percent to $372 million); and
·
Growth in internal revenue of 4.2
percent, due to an increase in used equipment sales revenue (up 10.2 percent to
$412 million), partially offset by a decrease in financing revenue (down 15.0
percent to $100 million).
The increase in revenue
in the first nine months, as compared to the same period in 2012, was due to:
·
Growth in internal revenue of 9.1
percent, due to an increase in used equipment sales revenue (up 18.7 percent to
$1,322 million), partially offset by a decrease in financing revenue (down 19.0
percent to $306 million); and
·
Growth in external revenue of 0.7
percent (3 percent adjusted for currency), due to an increase in financing
revenue (up 1.3 percent to $1,124 million), partially offset by a decrease in used
equipment sales revenue (down 1.5 percent to $363 million).
The increases in external
financing revenue in the third quarter and the first nine months of 2013,
compared to the same periods in 2012, were due to an increase in the average
asset balance, partially offset by lower asset yields. The decreases in internal
financing revenue in the third quarter and the first nine months of 2013,
compared to the same periods in 2012, were due to lower asset yields.
Global Financing gross
profit increased 1.8 percent in the third quarter and 5.0 percent in the first
nine months of 2013, respectively, compared to the same periods in 2012, due to
an increase in used equipment sales gross profit, partially offset by a
decrease in financing gross profit. The gross profit margin decreased 2.2
points in the third quarter, compared to the same period in 2012, due to margin
decreases in used equipment sales and financing, as well as a shift in mix
toward lower margin used equipment sales. The gross profit margin was flat in
the first nine months of 2013, compared to the same period in 2012.
Global Financing
pre-tax income increased 3.8 percent to $494 million in the third quarter of
2013, compared to the same period in 2012, due to higher gross profit ($12
million) and a decrease in financing receivables provisions ($6 million). The
decrease in financing receivables provisions was due to lower reserve
requirements in the current year. Pre-tax income increased 4.4 percent to $1,582
million in the first nine months of 2013, compared to the same period in 2012,
due to higher gross profit ($99 million), partially offset by increases in
financing receivables provisions ($27 million) and selling, general
Management Discussion –
(continued)
and administrative expenses ($6 million). The increase in
financing receivables provisions was due to higher specific reserve
requirements in the current year.
The decreases in return
on equity in the third quarter and in the first nine months of 2013, compared
to the same periods of 2012, were due to a higher average equity balance,
partially offset by the increase in after-tax income.
Financial Position
Balance Sheet
|
|
|
At September 30,
|
|
At December 31,
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
Cash
and cash equivalents
|
|
$
|
1,452
|
|
$
|
1,380
|
|
Net
investment in sales-type and direct financing leases
|
|
|
9,568
|
|
|
10,008
|
|
Equipment
under operating leases:
|
|
|
|
|
|
|
|
External clients (a)
|
|
|
1,032
|
|
|
1,273
|
|
Internal clients (b) (c)
|
|
|
0
|
|
|
25
|
|
Client
loans
|
|
|
12,649
|
|
|
13,121
|
|
Total
client financing assets
|
|
|
23,249
|
|
|
24,428
|
|
Commercial
financing receivables
|
|
|
6,278
|
|
|
7,755
|
|
Intercompany
financing receivables (b) (c)
|
|
|
4,061
|
|
|
4,328
|
|
Other
receivables
|
|
|
366
|
|
|
459
|
|
Other
assets
|
|
|
699
|
|
|
533
|
|
Total
assets
|
|
$
|
36,105
|
|
$
|
38,882
|
|
Intercompany
payables (b)
|
|
$
|
3,011
|
|
$
|
6,802
|
|
Debt
(d)
|
|
|
25,824
|
|
|
24,501
|
|
Other
liabilities
|
|
|
3,639
|
|
|
4,084
|
|
Total
liabilities
|
|
|
32,475
|
|
|
35,388
|
|
Total
equity
|
|
|
3,631
|
|
|
3,494
|
|
Total
liabilities and equity
|
|
$
|
36,105
|
|
$
|
38,882
|
(a) Includes intercompany mark-up,
priced on an arm’s-length basis, on products purchased from the company's
product divisions
which is eliminated in IBM's
consolidated results.
(b) Entire amount eliminated for
purposes of IBM's consolidated results and therefore does not appear on pages 5
and 6.
(c) These assets, along with all other
financing assets in this table, are leveraged at the value in the table using
Global Financing
debt.
(d) Global Financing debt is comprised of
intercompany loans and external debt. A portion of Global Financing debt is in
support
of the company's internal business,
or related to intercompany mark-up embedded in the Global Financing assets. See
table on
page 79.
Sources and Uses of Funds
The primary use of funds in Global Financing is to
originate client and commercial financing assets. Client financing assets for
end users consist primarily of IBM systems, software and services, but also
include OEM equipment, software and services to meet IBM clients’ total
solutions requirements. Client financing assets are primarily sales-type, direct
financing and operating leases for systems products, as well as loans for
systems, software and services with terms generally from one to seven years.
Global Financing’s client loans are primarily for software and services and are
unsecured. These loans are subjected to credit analysis to evaluate the
associated risk and, when deemed necessary, actions are taken to mitigate risks
in the loan agreements which include covenants to protect against credit
deterioration during the life of the obligation. Client financing also includes
internal activity as described on page 24 of the 2012 IBM Annual Report.
Commercial financing receivables arise primarily
from inventory and accounts receivable financing for dealers and remarketers of
IBM and OEM products. Payment terms for inventory financing and accounts
receivable financing generally range from 30 to 90 days. These short-term
receivables are primarily unsecured and are also subjected to additional credit
analysis in order to evaluate the associated risk.
In addition to the actions previously described, in
certain circumstances, the company may take mitigation actions to transfer
credit risk to third parties.
Management Discussion –
(continued)
At
September 30, 2013, substantially all financing assets are IT related assets,
and approximately 59 percent of the total external portfolio was with
investment grade clients with no direct exposure to consumers.
|
Originations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following are total financing originations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Client
financing
|
|
$
|
3,158
|
|
$
|
3,013
|
|
$
|
10,141
|
|
$
|
9,809
|
|
Commercial
financing
|
|
|
9,754
|
|
|
8,413
|
|
|
28,549
|
|
|
25,507
|
|
Total
|
|
$
|
12,912
|
|
$
|
11,426
|
|
$
|
38,690
|
|
$
|
35,316
|
Cash
collections of commercial financing assets exceeded new financing originations
in the third quarter of 2013, which resulted in a net decrease in financing
assets in this period. Cash collections of both commercial financing and client
financing assets exceeded new financing originations in the first nine months
of 2013, which resulted in a net decline in financing assets from December 31,
2012. The increase in originations in both periods was due to improving volumes
in client and commercial financing. Internal loan financing with Global
Services is executed under a loan facility and is not considered originations.
Cash generated by Global Financing was
deployed to pay intercompany payables and dividends to IBM as well as business
partners and OEM suppliers.
Global
Financing Receivables and Allowances
The
following table presents external financing receivables excluding residual
values and the allowance for credit losses:
|
|
|
At September 30,
|
|
At December 31,
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
Gross
financing receivables
|
|
$
|
28,218
|
|
|
$
|
30,621
|
|
|
Specific
allowance for credit losses
|
|
|
264
|
|
|
|
240
|
|
|
Unallocated
allowance for credit losses
|
|
|
91
|
|
|
|
115
|
|
|
Total
allowance for credit losses
|
|
|
354
|
|
|
|
355
|
|
|
Net
financing receivables
|
|
$
|
27,864
|
|
|
$
|
30,266
|
|
|
Allowance
for credit losses coverage
|
|
|
1.3
|
%
|
|
|
1.2
|
%
|
|
Roll
Forward of Global Financing Receivables Allowance for Credit Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Allowance
|
|
Additions/
|
|
|
|
|
|
|
January 1, 2013
|
|
Used*
|
|
(Reductions)
|
|
Other**
|
|
September 30, 2013
|
|
$
|
355
|
|
$
|
(31)
|
|
$
|
35
|
|
$
|
(4)
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Represents reserved receivables, net of recoveries,
that were disposed of during the period.
|
|
** Primarily represents translation adjustments.
|
The
percentage of Global Financing receivables
reserved increased from 1.2 percent at December 31, 2012, to 1.3 percent at
September 30, 2013, primarily due to an increase in specific reserve
requirements. Specific reserves increased 10 percent from $240 million at
December 31, 2012, to $264 million at September 30, 2013. Unallocated reserves
decreased 21 percent from $115 million at December 31, 2012, to
$91 million at September 30, 2013, due to the decline in gross financing
receivables and stabilization of the economic environment in Europe.
Global
Financing’s bad debt expense was $12 million for the three months ended
September 30, 2013, compared to $18 million for the same period in 2012. The
year-to-year decrease in bad debt expense was due to lower reserve requirements
in the current year. Global Financing’s bad debt expense was $35 million for
the nine months ended September 30, 2013,
Management Discussion –
(continued)
compared $8
million for the same period in 2012. The year-to-year increase in bad debt
expense was due to higher specific reserve requirements in the current year.
Residual
Value
Residual value is a risk unique to the financing business and management of
this risk is dependent upon the ability to accurately project future equipment
values at lease inception. Global Financing has insight into product plans and
cycles for the IBM products under lease. Based upon this product information,
Global Financing continually monitors projections of future equipment values
and compares them with the residual values reflected in the portfolio.
Global Financing optimizes
the recovery of residual values by selling assets sourced from end of lease,
leasing used equipment to new clients, or extending lease arrangements with
current clients. Sales of equipment, which are primarily sourced from equipment
returned at the end of a lease, represented 53.5 percent and 54.1 percent of
Global Financing's revenue in the third quarter and first nine months, respectively,
of 2013, and 50.6 percent and 49.9 percent in the third quarter and first nine
months, respectively, of 2012. The gross profit margins were 52.8 percent and
54.8 percent in the third quarter of 2013 and 2012, respectively. The decrease
was driven by a margin decrease in internal sales, partially offset by a margin
increase in external sales. The gross profit margins were 57.0 percent and 56.0
percent in the first nine months of 2013 and 2012, respectively. The increase was
driven by a shift in mix toward higher margin internal sales, partially offset
by a margin decrease in internal sales.
The
table on page 79 presents the recorded amount of unguaranteed residual value
for sales-type, direct financing and operating leases at January 1, 2013 and
September 30, 2013. In addition, the table presents the residual value as a
percentage of the related original amount financed and a run out of when the
unguaranteed residual value assigned to equipment on leases at September 30,
2013 is expected to be returned to the company. In addition to the unguaranteed
residual value, on a limited basis, Global Financing will obtain guarantees of
the future value of the equipment to be returned at end of lease. While
primarily focused on IBM products, guarantees are also obtained for certain OEM
products. These third-party guarantees are included in minimum lease payments
as provided for by accounting standards in the determination of lease
classifications for the covered equipment and provide protection against risk
of loss arising from declines in equipment values for these assets.
The residual value guarantee increases the minimum lease
payments that are utilized in determining the classification of a lease as a
sales-type lease, direct financing lease or operating lease. The aggregate
asset values associated with the guarantees of sales-type leases were
$80 million and $175 million for the financing transactions
originated during the quarters ended September 30, 2013 and September 30, 2012,
respectively, and $306 million and $461 million for the nine months ended
September 30, 2013 and September 30, 2012, respectively. The aggregate asset
values associated with the guarantees of direct financing leases were $55
million and $42 million for the financing transactions originated during the
quarters ended September 30, 2013 and September 30, 2012, respectively, and
$170 million and $137 million for the nine months ended September 30, 2013 and
September 30, 2012, respectively. The associated aggregate guaranteed future
values at the scheduled end of lease were $6 million and $18 million
for the financing transactions originated during the quarters ended September
30, 2013 and September 30, 2012, respectively, and $19 million and $38 million
for the nine months ended September 30, 2013 and September 30, 2012,
respectively. The cost of guarantees was $0.6 million and $1.8 million for the
quarters ended September 30, 2013 and September 30, 2012, respectively, and
$1.9 million and $3.8 million for the nine months ended September 30, 2013 and
September 30, 2012, respectively.
Management Discussion –
(continued)
|
Unguaranteed Residual Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Run Out of
|
|
|
|
|
At
|
|
|
|
At
|
|
|
September 30, 2013
Balance
|
|
|
|
January 1,
|
|
September 30,
|
|
|
|
|
|
|
|
2016 and
|
|
(Dollars in millions)
|
|
2013
|
|
2013
|
|
2013
|
|
2014
|
|
2015
|
|
Beyond
|
|
Sales-type
and direct financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
leases
|
|
$
|
794
|
|
|
$
|
734
|
|
|
$
|
47
|
|
$
|
164
|
|
$
|
207
|
|
$
|
316
|
|
Operating
leases
|
|
|
259
|
|
|
|
208
|
|
|
|
35
|
|
|
76
|
|
|
53
|
|
|
44
|
|
Total
unguaranteed residual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value
|
|
$
|
1,053
|
|
|
$
|
942
|
|
|
$
|
82
|
|
$
|
240
|
|
$
|
260
|
|
$
|
360
|
|
Related
original amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financed
|
|
$
|
18,744
|
|
|
$
|
17,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
5.6
|
%
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
At December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Debt-to-equity
ratio
|
|
|
7.1
|
x
|
|
|
7.0
|
x
|
The company funds Global
Financing through borrowings using a debt-to-equity ratio target of
approximately 7 to 1. The debt used to fund Global Financing assets is composed
of intercompany loans and external debt. The terms of the intercompany loans
are set by the company to substantially match the term and currency underlying
the financing receivable and are based on arm's-length pricing. Both assets and
debt are presented in the Global Financing balance sheet on page 76.
Global
Financing provides financing predominantly for the company’s external client
assets, as well as for assets under contract by other IBM units. As previously
stated, the company measures Global Financing as a stand-alone entity, and accordingly,
interest expense relating to debt supporting Global Financing’s external client
and internal business is included in the “Global Financing Results of
Operations” on page 75 and in Segment Information on pages 25 to 27.
In the
company’s Consolidated Statement of Earnings on page 3, the external
debt-related interest expense supporting Global Financing’s internal financing
to the company is reclassified from cost of financing to interest expense.
The following table provides additional information
on total company debt. In this table, intercompany activity includes internal
loans and leases at arm’s-length pricing in support of Global Services’
long-term contracts and other internal activity. The company believes these
assets should be appropriately leveraged in line with the overall Global
Financing business model.
|
(Dollars in millions)
|
|
At September 30, 2013
|
|
At December 31, 2012
|
|
Global
Financing Segment
|
|
|
|
|
|
|
$
|
25,824
|
|
|
|
|
|
|
$
|
24,501
|
|
Debt to support external clients
|
|
|
$
|
22,755
|
|
|
|
|
|
|
$
|
21,583
|
|
|
|
|
|
Debt to support internal clients
|
|
|
|
3,068
|
|
|
|
|
|
|
|
2,919
|
|
|
|
|
|
Non-Global
Financing Segments
|
|
|
|
|
|
|
|
10,356
|
|
|
|
|
|
|
|
8,767
|
|
Debt supporting operations
|
|
|
|
13,424
|
|
|
|
|
|
|
|
11,686
|
|
|
|
|
|
Intercompany activity
|
|
|
|
(3,068)
|
|
|
|
|
|
|
|
(2,919)
|
|
|
|
|
|
Total
company debt
|
|
|
|
|
|
|
$
|
36,180
|
|
|
|
|
|
|
$
|
33,269
|
Liquidity and
Capital Resources
Global
Financing is a segment of the company, and therefore is supported by the
company’s overall liquidity position and access to capital markets. Cash
generated by Global Financing was deployed to pay dividends to the company in
order to maintain an appropriate debt-to-equity ratio.
Management Discussion –
(continued)
Return on Equity
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Financing after tax income*
|
|
$
|
333
|
|
|
$
|
319
|
|
|
$
|
1,066
|
|
|
$
|
1,016
|
|
|
Annualized
after tax income (A)
|
|
$
|
1,331
|
|
|
$
|
1,277
|
|
|
$
|
1,421
|
|
|
$
|
1,355
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Global Financing equity (B)**
|
|
$
|
3,543
|
|
|
$
|
3,253
|
|
|
$
|
3,525
|
|
|
$
|
3,279
|
|
|
Global
Financing return on equity(A)/(B)
|
|
|
37.6
|
%
|
|
|
39.3
|
%
|
|
|
40.3
|
%
|
|
|
41.3
|
%
|
* Calculated based upon an estimated tax
rate principally based on Global Financing’s geographic mix of earnings as
IBM’s provision for income taxes is
determined on a consolidated basis.
** Average of the ending equity for Global
Financing for the last 2 quarters and 4 quarters, for the three months ended
September 30, and for the nine months
ended September 30, respectively.
Looking
Forward
Global Financing's
financial position provides flexibility and funding capacity which enables the
company to be well positioned in the current environment. Global Financing’s
assets and new financing volumes are IBM and OEM products and services financed
to the company’s clients and business partners, and substantially all financing
assets are IT related assets which provide a stable base of business for future
growth. Global Financing’s offerings are competitive and available to clients
as a result of the company’s borrowing cost and access to the capital markets.
Overall, Global Financing’s originations will be dependent upon the demand for
IT products and services as well as client participation rates.
IBM continues to access both the short-term
commercial paper market and the medium- and long-term debt markets. A
protracted period where IBM could not access the capital markets would likely
lead to a slowdown in originations.
Interest rates and the overall economy (including
currency fluctuations) will have an effect on both revenue and gross profit.
The company’s interest rate risk management policy, however, combined with the
Global Financing pricing strategy should mitigate gross margin erosion due to
changes in interest rates.
The economy could impact the credit quality of the
Global Financing receivables portfolio and therefore the level of provision for
credit losses. Global Financing will continue to apply rigorous credit policies
in both the origination of new business and the evaluation of the existing
portfolio.
As discussed on page 78, Global Financing has
historically been able to manage residual value risk both through insight into
the company’s product cycles, as well as through its remarketing business.
Global
Financing has policies in place to manage each of the key risks involved in
financing. These policies, combined with product and client knowledge, should
allow for the prudent management of the business going forward, even during
periods of uncertainty with respect to the global economy.
Management Discussion –
(continued)
GAAP
Reconciliation
The tables below provide a reconciliation of the
company’s income statement results as reported under GAAP to its operating
earnings presentation which is a non-GAAP measure. The company’s calculation of
operating earnings, as presented, may differ from similarly titled measures
reported by other companies. Please refer to the “Snapshot” section beginning
on page 42 for the company’s rationale for presenting operating earnings
information.
|
(Dollars in millions except per share amounts)
|
|
|
|
|
|
Acquisition-related
|
|
|
Retirement-related
|
|
|
Operating
|
|
|
For the three months ended September 30, 2013
|
|
GAAP
|
|
|
adjustments
|
|
|
adjustments
|
|
|
(Non-GAAP)
|
|
|
Gross
profit
|
|
$
|
11,380
|
|
|
$
|
102
|
|
|
$
|
154
|
|
|
$
|
11,636
|
|
|
Gross
profit margin
|
|
|
48.0
|
%
|
|
|
0.4
|
pts.
|
|
|
0.6
|
pts.
|
|
|
49.1
|
%
|
|
S,G&A
|
|
$
|
5,255
|
|
|
$
|
(111)
|
|
|
$
|
(89)
|
|
|
$
|
5,055
|
|
|
R,D&E
|
|
|
1,468
|
|
|
|
0
|
|
|
|
(14)
|
|
|
|
1,454
|
|
|
Other
(income) and expense
|
|
|
(62)
|
|
|
|
(1)
|
|
|
|
0
|
|
|
|
(63)
|
|
|
Total
expense and other (income)
|
|
|
6,567
|
|
|
|
(112)
|
|
|
|
(103)
|
|
|
|
6,352
|
|
|
Pre-tax
income
|
|
|
4,812
|
|
|
|
214
|
|
|
|
257
|
|
|
|
5,284
|
|
|
Pre-tax
income margin
|
|
|
20.3
|
%
|
|
|
0.9
|
pts.
|
|
|
1.1
|
pts.
|
|
|
22.3
|
%
|
|
Provision
for income taxes*
|
|
$
|
772
|
|
|
$
|
48
|
|
|
$
|
77
|
|
|
$
|
897
|
|
|
Effective
tax rate
|
|
|
16.0
|
%
|
|
|
0.3
|
pts.
|
|
|
0.7
|
pts.
|
|
|
17.0
|
%
|
|
Net
income
|
|
$
|
4,041
|
|
|
$
|
166
|
|
|
$
|
181
|
|
|
$
|
4,387
|
|
|
Net
income margin
|
|
|
17.0
|
%
|
|
|
0.7
|
pts.
|
|
|
0.8
|
pts.
|
|
|
18.5
|
%
|
|
Diluted
earnings per share
|
|
$
|
3.68
|
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
|
$
|
3.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* The tax impact on operating (non-GAAP) pre-tax income
is calculated under the same accounting principles applied to the GAAP
|
|
|
pre-tax income which employs an annual effective tax
rate method to the results.
|
|
|
(Dollars in millions except per share amounts)
|
|
|
|
|
|
Acquisition-related
|
|
|
Retirement-related
|
|
|
Operating
|
|
|
For the three months ended September 30, 2012
|
|
GAAP
|
|
|
adjustments
|
|
|
adjustments
|
|
|
(Non-GAAP)
|
|
|
Gross
profit
|
|
$
|
11,732
|
|
|
$
|
95
|
|
|
$
|
67
|
|
|
$
|
11,894
|
|
|
Gross
profit margin
|
|
|
47.4
|
%
|
|
|
0.4
|
pts.
|
|
|
0.3
|
pts.
|
|
|
48.1
|
%
|
|
S,G&A
|
|
$
|
5,908
|
|
|
$
|
(88)
|
|
|
$
|
(196)
|
|
|
$
|
5,625
|
|
|
R,D&E
|
|
|
1,534
|
|
|
|
0
|
|
|
|
5
|
|
|
|
1,539
|
|
|
Other
(income) and expense
|
|
|
(606)
|
|
|
|
(5)
|
|
|
|
0
|
|
|
|
(611)
|
|
|
Total
expense and other (income)
|
|
|
6,657
|
|
|
|
(92)
|
|
|
|
(191)
|
|
|
|
6,374
|
|
|
Pre-tax
income
|
|
|
5,074
|
|
|
|
188
|
|
|
|
258
|
|
|
|
5,520
|
|
|
Pre-tax
income margin
|
|
|
20.5
|
%
|
|
|
0.8
|
pts.
|
|
|
1.0
|
pts.
|
|
|
22.3
|
%
|
|
Provision
for income taxes*
|
|
$
|
1,251
|
|
|
$
|
47
|
|
|
$
|
67
|
|
|
$
|
1,364
|
|
|
Effective
tax rate
|
|
|
24.6
|
%
|
|
|
0.0
|
pts.
|
|
|
0.1
|
pts.
|
|
|
24.7
|
%
|
|
Net
income
|
|
$
|
3,824
|
|
|
$
|
141
|
|
|
$
|
191
|
|
|
$
|
4,155
|
|
|
Net
income margin
|
|
|
15.5
|
%
|
|
|
0.6
|
pts.
|
|
|
0.8
|
pts.
|
|
|
16.8
|
%
|
|
Diluted
earnings per share
|
|
$
|
3.33
|
|
|
$
|
0.12
|
|
|
$
|
0.17
|
|
|
$
|
3.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* The tax impact on operating (non-GAAP) pre-tax income
is calculated under the same accounting principles applied to the GAAP
|
|
|
pre-tax income which employs an annual effective tax
rate method to the results.
|
|
Management Discussion –
(continued)
|
(Dollars in millions except per share
amounts)
|
|
|
Acquisition-related
|
|
|
Retirement-related
|
|
|
Operating
|
|
|
For the nine months ended September 30, 2013
|
|
GAAP
|
|
|
adjustments
|
|
|
adjustments
|
|
|
(Non-GAAP)
|
|
|
Gross
profit
|
|
$
|
34,189
|
|
|
$
|
289
|
|
|
$
|
474
|
|
|
$
|
34,953
|
|
|
Gross
profit margin
|
|
|
47.5
|
%
|
|
|
0.4
|
pts.
|
|
|
0.7
|
pts.
|
|
|
48.5
|
%
|
|
S,G&A
|
|
$
|
17,512
|
|
|
$
|
(294)
|
|
|
$
|
(286)
|
|
|
$
|
16,933
|
|
|
R,D&E
|
|
|
4,661
|
|
|
|
0
|
|
|
|
(43)
|
|
|
|
4,618
|
|
|
Other
(income) and expense
|
|
|
(214)
|
|
|
|
(8)
|
|
|
|
0
|
|
|
|
(222)
|
|
|
Total
expense and other (income)
|
|
|
21,627
|
|
|
|
(302)
|
|
|
|
(329)
|
|
|
|
20,997
|
|
|
Pre-tax
income
|
|
|
12,562
|
|
|
|
590.5
|
|
|
|
803
|
|
|
|
13,956
|
|
|
Pre-tax
income margin
|
|
|
17.4
|
%
|
|
|
0.8
|
pts.
|
|
|
1.1
|
pts.
|
|
|
19.4
|
%
|
|
Provision
for income taxes*
|
|
$
|
2,263
|
|
|
$
|
112
|
|
|
$
|
239
|
|
|
$
|
2,614
|
|
|
Effective
tax rate
|
|
|
18.0
|
%
|
|
|
0.0
|
pts.
|
|
|
0.7
|
pts.
|
|
|
18.7
|
%
|
|
Net
income
|
|
$
|
10,299
|
|
|
$
|
479
|
|
|
$
|
564
|
|
|
$
|
11,342
|
|
|
Net
income margin
|
|
|
14.3
|
%
|
|
|
0.7
|
pts.
|
|
|
0.8
|
pts.
|
|
|
15.7
|
%
|
|
Diluted
earnings per share
|
|
$
|
9.27
|
|
|
$
|
0.43
|
|
|
$
|
0.51
|
|
|
$
|
10.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* The tax impact on operating (non-GAAP) pre-tax income
is calculated under the same accounting principles applied to the GAAP
|
|
|
pre-tax income which employs an annual effective tax
rate method to the results.
|
|
|
(Dollars in millions except per share amounts)
|
|
|
Acquisition-related
|
|
|
Retirement-related
|
|
|
Operating
|
|
|
For the nine months ended September 30, 2012
|
|
GAAP
|
|
|
adjustments
|
|
|
adjustments
|
|
|
(Non-GAAP)
|
|
|
Gross
profit
|
|
$
|
35,131
|
|
|
$
|
276
|
|
|
$
|
204
|
|
|
$
|
35,611
|
|
|
Gross
profit margin
|
|
|
46.7
|
%
|
|
|
0.4
|
pts.
|
|
|
0.3
|
pts.
|
|
|
47.4
|
%
|
|
S,G&A
|
|
$
|
17,632
|
|
|
$
|
(258)
|
|
|
$
|
(265)
|
|
|
$
|
17,108
|
|
|
R,D&E
|
|
|
4,722
|
|
|
|
0
|
|
|
|
14
|
|
|
|
4,736
|
|
|
Other
(income) and expense
|
|
|
(796)
|
|
|
|
(7)
|
|
|
|
0
|
|
|
|
(803)
|
|
|
Total
expense and other (income)
|
|
|
21,060
|
|
|
|
(265)
|
|
|
|
(251)
|
|
|
|
20,545
|
|
|
Pre-tax
income
|
|
|
14,071
|
|
|
|
541
|
|
|
|
454
|
|
|
|
15,067
|
|
|
Pre-tax
income margin
|
|
|
18.7
|
%
|
|
|
0.7
|
pts.
|
|
|
0.6
|
pts.
|
|
|
20.0
|
%
|
|
Provision
for income taxes*
|
|
$
|
3,300
|
|
|
$
|
143
|
|
|
$
|
127
|
|
|
$
|
3,569
|
|
|
Effective
tax rate
|
|
|
23.5
|
%
|
|
|
0.1
|
pts.
|
|
|
0.1
|
pts.
|
|
|
23.7
|
%
|
|
Net
income
|
|
$
|
10,771
|
|
|
$
|
399
|
|
|
$
|
328
|
|
|
$
|
11,498
|
|
|
Net
income margin
|
|
|
14.3
|
%
|
|
|
0.5
|
pts.
|
|
|
0.4
|
pts.
|
|
|
15.3
|
%
|
|
Diluted
earnings per share
|
|
$
|
9.27
|
|
|
$
|
0.34
|
|
|
$
|
0.28
|
|
|
$
|
9.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* The tax impact on operating (non-GAAP) pre-tax income
is calculated under the same accounting principles applied to the GAAP
|
|
|
pre-tax income which employs an annual effective tax
rate method to the results.
|
|
Forward-Looking
and Cautionary Statements
Except
for the historical information and discussions contained herein, statements
contained in this Form 10-Q may constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements are based on the company’s current
assumptions regarding future business and financial performance. These statements
involve a number of risks, uncertainties and other factors that could cause
actual results to differ materially, including the following: a downturn in
economic environment and corporate IT spending budgets; the company's failure
to meet growth and productivity objectives; a failure of the company's
innovation initiatives; risks from investing in growth opportunities; failure
of the company's intellectual property portfolio to prevent competitive
offerings and the failure of the company to obtain necessary licenses;
cybersecurity and data privacy considerations; fluctuations in financial
results and purchases; impact of local legal, economic, political and health
conditions; adverse effects from environmental matters, tax matters and the
company's pension plans; ineffective internal controls; the company’s use of
accounting estimates; the company’s ability to attract and retain key personnel
and its reliance on critical skills; impacts of relationships with critical
suppliers and business with government clients; currency fluctuations and
customer financing risks; impact of changes in market liquidity conditions and
customer credit risk on receivables; reliance on third party distribution
channels; the company’s ability to successfully manage acquisitions and alliances;
risk factors related to IBM securities; and other risks, uncertainties and
factors discussed in the company’s Form 10-Qs, Form 10-K and in the
company’s other filings with the U.S. Securities and Exchange Commission (SEC)
or in materials incorporated therein or herein by reference. The company
assumes no obligation to update or revise any forward-looking statements.
Item 4.
Controls and Procedures
The
company’s management evaluated, with the participation of the Chief Executive
Officer and Chief Financial Officer, the effectiveness of the company’s
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the company’s disclosure controls and
procedures were effective as of the end of the period covered by this report.
There has been no change in the company’s internal control over financial
reporting that occurred during the quarter covered by this report that has
materially affected, or is reasonably likely to materially affect, the
company’s internal control over financial reporting.
Part II – Other Information
Item 1. Legal Proceedings
Refer
to Note 12, “Contingencies,” on pages 38 to 40 of this Form 10-Q.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities
The
following table provides information relating to the company’s repurchase of
common stock for the third quarter of 2013.
|
|
|
|
|
|
|
Total Number
|
|
Approximate
|
|
|
|
|
|
|
|
of Shares
|
|
Dollar Value
|
|
|
|
|
|
|
|
Purchased as
|
|
of Shares that
|
|
|
|
Total Number
|
|
Average
|
|
Part of Publicly
|
|
May Yet Be
|
|
|
|
of Shares
|
|
Price Paid
|
|
Announced
|
|
Purchased Under
|
|
Period
|
|
Purchased
|
|
per Share
|
|
Program
|
|
The Program*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
1, 2013 - July 31, 2013
|
|
4,263,207
|
|
$
|
194.43
|
|
|
4,263,207
|
|
$
|
6,828,768,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
1, 2013 - August 31, 2013
|
|
|
3,232,800
|
|
$
|
187.25
|
|
|
3,232,800
|
|
$
|
6,223,411,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
1, 2013 - September 30, 2013
|
|
3,040,200
|
|
$
|
188.99
|
|
|
3,040,200
|
|
$
|
5,648,842,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,536,207
|
|
$
|
190.66
|
|
|
10,536,207
|
|
|
|
* On October 30, 2012, the Board of
Directors authorized $5.0 billion in funds for use in the company’s common
stock repurchase program. On April 30, 2013, the Board of Directors authorized
an additional $5.0 billion in funds for use in such program. In each case, the
company stated that it would repurchase shares on the open market or in private
transactions depending on market conditions and that it expects to use cash
from operations for the repurchases. The common stock repurchase program does
not have an expiration date. This table does not include shares tendered to
satisfy the exercise price in connection with cashless exercises of employee
stock options or shares tendered to satisfy tax withholding obligations in
connection with employee equity awards.
Item
6. Exhibits
Exhibit Number
|
|
|
|
|
11
|
|
Statement re: computation of per share earnings.
|
|
|
|
|
|
12
|
|
Statement re: computation of ratios.
|
|
|
|
|
|
31.1
|
|
Certification
by principal executive officer pursuant to Rule 13A-14(a) or 15D-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
31.2
|
|
Certification
by principal financial officer pursuant to Rule 13A-14(a) or 15D-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32.1
|
|
Certification
by principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32.2
|
|
Certification
by principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
101
|
|
Interactive
data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated
Statement of Earnings for the three and nine months ended September 30, 2013
and 2012, (ii) the Consolidated Statement of Comprehensive Income for the
three and nine months ended September 30, 2013 and 2012, (iii) the
Consolidated Statement of Financial Position at September 30, 2013 and December
31, 2012, (iii) the Consolidated Statement of Cash Flows for the nine months
ended September 30, 2013 and 2012, (iv) the Consolidated Statement of Changes
in Equity for the nine months ended September 30, 2013 and 2012 and (v) the
notes to the Consolidated Financial Statements.
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SIGNATURE
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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International Business Machines
Corporation
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(Registrant)
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Date: October 29, 2013
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By:
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/s/
James J. Kavanaugh
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James J. Kavanaugh
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Vice President and Controller
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